L&T Q4: Strong order flows, margins build case for re-rating of stock
L&T’s Q4 order flows closed FY18 with a comfortable order book of Rs2,63,107 crore, sufficient to keep its revenue and profit metres ticking for the next 2 years
Finally, engineering juggernaut Larsen and Toubro Ltd (L&T) looks set for a rerating. After many quarters of slips and disappointments, the firm ticked off all the boxes on the analysts’ radar, with the best news coming on order flows and margin expansion.
In the limelight was the Rs49,577 crore order flow during the quarter, which was the highest in the company’s history.
Interestingly, the break-up shows higher traction in domestic orders compared to international ones. The 11% growth in orders in the infrastructure segment mirror a pickup in domestic investment activity in the second half of FY18. However, only one-third of the orders in the year came from the private sector. Given the excess capacity in most sectors and a stressed banking environment, it may take several quarters for the private sector capex to gain momentum.
Although L&T had ventured into overseas markets a few years ago to tide over the slowdown on home ground, the firm has now turned cautious in these markets. “Hardening of oil prices, fluctuation in commodity prices and currency movements have infused volatility in the economies and businesses,” it said in a media release.
Be that as it may, the quarter’s order flows closed FY18 with a comfortable order book of Rs2,63,107 crore, sufficient to keep the behemoth’s revenue and profit metres ticking for the next two years.
Besides, L&T’s Ebitda (earnings before interest, tax, depreciation and amortization) margin at 13.2% made investors happy, coming in 100 basis points higher than Bloomberg’s average estimate and 230 basis points higher than the year-ago period. A combination of operating efficiencies, timely project execution and higher profit margins from the hydrocarbons, and electrical and automation segments expanded margins during the quarter.
The turmoil in international markets was perhaps mirrored in the drop in margins in the infrastructure segment.
Strong margin performance trickled down to 5% year-on-year growth in the quarter’s net profit at Rs3,167 crore, which was also higher than Street estimates.
The results saw improved efficiency on the working capital front too. Analysts reckon that this, along with sale of non-core assets (such as the recent sale of the electrical business for Rs14,000 crore), should improve capital allocation in the coming years.
The odds are getting better for L&T, with the only hiccup being weaker order flows in the March quarter of FY19 due to elections. However, the management reckons that government orders would come in much earlier, perhaps in the first three quarters.
This apart, the management’s guidance of a 12-15% revenue growth and 10-12% order flow growth in FY19 was better than expected. This should fire earnings growth, too. At the current market price of Rs1,377, L&T’s stock price discounts the estimated earnings for FY19 by around 24 times. As a report by Edelweiss Securities Ltd says: “We believe it is time to assign a peak-cycle multiple of 28.”