For an infrastructure company with a gigantic order book, the focus in earnings is usually on execution and business outlook. Larsen and Toubro Ltd (L&T), with an order backlog of 2.8 trillion—2.3 times FY18 revenue—did exceedingly well on this front. Revenue during the September quarter (Q2) rose by 21%, beating analysts’ estimates. Importantly, the company’s efficiency improvement measures have begun to yield benefits. Expenses as a percentage of revenue moderated, aiding profitability.

As a consequence, operating earnings (up 27%) and net profit (up 21%) grew at a faster pace. The numbers include an exceptional or non-recurring gain. Even adjusted for this, profits have grown, says L&T.

Order inflows jumped 46%, indicating a healthy outlook. Encouragingly, the order inflows were driven by the domestic market. According to L&T, tendering activity in India was strong, with the public sector driving momentum.

Segment-wise, the company’s mainstay infrastructure division drove growth, both on order inflows and revenues. Power remains a laggard. Heavy engineering and hydrocarbon segments clocked strong growth, helped by renewed buoyancy in the oil and gas business, and focus on clean fuels.

As the chart above shows, the performance comfortably places L&T to meet its full-year order inflow growth guidance of 10-12% and 12-15% growth in revenues (growth in first half is much higher). Even so, the management remains cautious pointing to lumpiness in order inflows and volatility in the market.

The caution underscores the uncertain times. Investments by the private sector are yet to take off in a major way. While the government’s thrust on infrastructure development is driving the momentum in the domestic market, sustainability remains a question mark.

The fear is clearances and fund allocations may take a back seat in an election year (towards the end of the fourth quarter), slowing the business momentum. These concerns have weighed on the L&T stock.

Despite the company announcing a share buyback, and a strategy rethink to exit non-core businesses and focus on returns improvement, the stock hasn’t been a very strong outperformer. Sustainability of the momentum in execution and government-led investment remain key.

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