Drop in order inflows clouds L&T’s stellar operating show

Even as L&T posted a stellar operating performance that beat forecasts on revenue, profit and operating margin, order inflows remained elusive

Graphic: Ajay Negi/Mint
Graphic: Ajay Negi/Mint

Finally, in the last quarter (March) of fiscal year 2016, things did get better for Larsen and Toubro Ltd (L&T), after three quarters of titanic struggle. But even as it posted a stellar operating performance that beat forecasts on revenue, profit and operating margin, order inflows remained elusive.

If order inflows are an indication of the times to come, then the 9% year-on-year drop in fresh orders during the quarter is not good news. For the 12-month period ended March 2016, the 12% dip in orders inflows fell short of even the management guidance of “flat growth”. Not to forget that the management had watered down its estimate from 15% at the beginning of the year. Perhaps the loss of orders in the power segment and the pathetic state of the heavy engineering, metals, and electrical and automation segments explains this drop.

However, set this factor aside, and L&T’s March quarter leaves nothing for investors to crib about. Consolidated net revenue jumped by 18.3% from a year back as the company’s core business segment—infrastructure—clocked 20% revenue growth. Information technology and financial services too contributed sufficiently to revenue growth.

Even better was the beat on operating margin. At 14.7%, it topped the 14-broker Bloomberg consensus by 220 basis points as it raced ahead of the year-ago number by 190 basis points. A basis point is 0.01%. Again, margin outperformance came from the infrastructure segment, which more than compensated for the deplorable performance of the heavy engineering and hydrocarbons divisions. Fortunately, these comprise a small portion of the overall business of the juggernaut.

Operating performance trickled down and L&T saw a 19% jump in consolidated net profit, way beyond what the Street expected.

This is not all. The management, in its media address, appeared optimistic of an economic recovery both on the domestic turf and in overseas markets like West Asia, other regions of Asia and Africa. And it is still sitting on a massive order book of Rs.2.49 trillion, assuring decent revenue growth over the next three years. Some analysts say that with a sizeable chunk of international orders, the company may not be able to sustain the March quarter’s operating margin in the near term. Interest costs during the quarter rose from a year back, underlining the pressure on working capital.

The moot question is: will the stock continue to inch up as it has done in the last three months, after a spark in the March quarter results? Sure, the stock is among the best plays on the economy and has more often than not outperformed benchmark indices.

Or, will a drop in order inflows dampen investor sentiment? Yes, the management has guided for a 10-15% growth in order inflows for fiscal year 2017. What must not be ignored, however, is that fiscal year 2016 too started on a similar note but then estimates were trimmed thereafter. After all, there’s still uncertainty on the fate of the monsoon, and crude oil and commodity prices, all of which impact L&T’s performance.

The writer does not own shares in the above-mentioned companies.

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