(Vipul Sharma/Mint )
(Vipul Sharma/Mint )

L&T powers up in March quarter but valuations need more mojo

  • Larsen and Toubro’s Ebitda in the March quarter was slightly below Street expectations
  • But growth in revenue and order flows was robust at 10.5 % and 14%, respectively

Larsen and Toubro Ltd’s (L&T’s) shares have been in a state of inertia for a year. They have risen 0.5% in the past year. A robust March quarter show has propelled the company ahead of its order flow and revenue guidance for the full year. Will this energize the stock, or are there concerns that will weigh it down?

True, the March quarter Ebitda (earnings before interest, taxes, depreciation and amortization) of 5,594 crore was slightly below forecasts. The company’s core business, namely the infrastructure segment, was the culprit.

According to the management, “Cost pressures encountered in a few projects and cost provisions pending client approval of additional claims in some projects" dragged profitability.

However, analysts reckon that L&T’s quarterly margins are volatile, due to the long gestation of some of its projects and the manner of revenue recognition.

That said, the revenue growth of 10.5% and order flow growth of 14% were the highlights for the quarter. Segment-wise break-up of revenue shows that the company’s core business, which is infrastructure, clocked a robust 15% growth from the year earlier.

Even the hydrocarbon business, which has been gaining traction over the last few quarters, fared well with 29% revenue growth.

Barring the power segment, which continues to be a drag, other segments, including heavy engineering and defence, did well.

All this is on the back of its robust order book, which stood at 2.93 trillion at the end of fiscal year 2019. Overall, L&T has clocked a decent show in FY19, in spite of headwinds, such as the liquidity crisis and weak private sector activity.

The management has spelt out a cautious outlook for the first two quarters of FY20, due to the overhang of the general elections. Further, while private sector capex is unlikely to revive in the near term, international trade conflicts amid high crude oil prices are risks to growth in international order flows as well. As if all this is not enough, government data showed that industrial output shrank for the first time in 21 months.

Some other issues have also weighed on the L&T stock in recent months. While the Mindtree Ltd acquisition may be a feather in its cap, investors are worried about allocation of capital towards non-core businesses.

Apart from the large cash reserves the company is sitting on, analysts foresee more cash addition as the sale of its electrical and automation division gets regulatory approval over the next 12-18 months.

The Street is worried that L&T’s return on equity (RoE) could be under pressure. True, RoE has risen to 15% in FY19 from 14% in FY18. The moot question, however, is: How will the company achieve its 18% RoE target by FY21?