Are L&T’s robust order flows a sign of economic recovery?
L&T’s December quarter results showed promise with order flow at Rs48,130 crore that shot past expectations on the Street
After two lacklustre quarters, order inflows at the country’s infrastructure juggernaut Larsen and Toubro Ltd (L&T) have gained momentum. The company’s December quarter results showed promise with order flows at Rs48,130 crore that shot past expectations on the Street. Further, the 38% year-on-year jump was a pleasant surprise compared to a worrisome 11% and 8% decline in order flows during the June and September quarters, respectively.
What’s more, the share of domestic orders has risen significantly in the quarter compared to the year-ago period. This shows the Indian economy in good light, given that L&T is the largest play on engineering and infrastructure activity in the country. A little over half of these orders poured in from the infrastructure segment with large-ticket orders from areas such as water and effluent treatment, transportation, and heavy civil engineering.
However, apart from infrastructure, segments such as electrical and automation, and power put up a dull show. Perhaps this is a sign that industrial activity is yet to bounce back. Meanwhile, order intake in hydrocarbons was robust with 34% coming from international turf as expected.
Strong order traction is the key reason for L&T’s shares outperforming benchmark indices. The Rs2.7 trillion order book at the end of the December quarter assures investors of stable revenue and profit growth ahead. On a like-to-like basis, the quarter’s revenue rose by 10%, while the operating profit shot up by 25% when compared to the year-ago period.
Undoubtedly, the infrastructure segment is the single-largest contributor to L&T’s revenue and operating profit.
Sectors such as power, heavy engineering, and electrical and automation managed to sustain profitability at the year-ago levels, while the services segment, although small, pulled off a strong double-digit margin. On the whole, L&T’s operating margin of 9.1% was a tad lower than the year-ago period and missed the Street’s estimate of 10%. However, the management explained that this only reflects the state of job mix and project completion stages during the quarter.
The conglomerate’s 48% jump in net profit for the quarter too was commendable and beat Bloomberg’s average estimate.
Be that as it may, a quarter’s surprise in order flows and performance is hardly sufficient to support a rerating in the stock. At its current price of Rs1,416, the L&T stock trades at a rich 25 times the estimated earnings for fiscal year 2019. After all, the revenue guidance is only 12% higher for FY18 with a stable profit margin. Also, the management has retained its watered-down guidance of zero-to-flat order inflows for FY18, which the conglomerate will easily pull off, given that the March quarter is a relatively good one.
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