L&T’s orders soothe, but margin worries remain

 L&T is confident of surpassing its FY25 year-on-year order inflow and revenue growth guidance of 10% and 15%, respectively.
L&T is confident of surpassing its FY25 year-on-year order inflow and revenue growth guidance of 10% and 15%, respectively.

Summary

  • A key worry is that L&T's recent large order wins may be margin-dilutive.

Larsen & Toubro Ltd’s (L&T) shares fell 3% on Saturday, pretty much wiping away the gains it saw the previous day in reaction to the December quarter results (Q3FY25). Positives of Q3 aside, some part of the stock upmove was in anticipation that capital expenditure (capex) allotment could be higher in budget 2025. But a modest uptick in FY26 capex has upset investors. L&T is considered as a proxy to the country’s infrastructure developments as government orders form a huge chunk of its order book.

Nonetheless, the company is bracing for a robust March quarter (Q4) as it is well-placed in four-five large orders, amounting to 50,000 crore and some or all of these may get finalized quarter, the management said in Q3 earnings call. The order inflow ask-rate for Q4 is 65,000 crore, it added.

Of course, timely execution is a crucial variable here. L&T is confident of surpassing its FY25 year-on-year order inflow and revenue growth guidance of 10% and 15%, respectively. “With robust momentum in inflows, receiving 90% of last year inflows in 9MFY25, along with a healthy pipeline of 5.5 trillion for the next three months, we factor in 13.9% growth in inflows in FY25E," said an Elara Securities (India) report dated 31 January. Order book at 5.64 trillion provides a book-to-bill visibility of 3.2x, it added.

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Order inflows for L&T’s core projects & manufacturing (P&M) business surged 64% year-on-year, hitting a record 98,700 crore in Q3, led by two ultra-mega orders win. Domestic orders were at 48% of the inflow mix, while international was 52%. International orders have done the heavy-lifting for L&T lately. Within international, a large chunk continues to come from the Middle East where volatility in oil prices needs to be monitored.

But for now, the recovery in domestic order inflow allays lingering concerns of weaker domestic inflows seen in H1FY25. The total domestic order book mix consists of central government (15%), public sector units (PSUs) (39%), state government (26%) and private (20%). In Q3, order inflow at 1.16 trillion was meaningfully ahead of our estimate of 85,000 crore, said Antique Stock Broking Ltd, supported by strong order finalization in the domestic market.

Higher customer collections last quarter led to a meaningful improvement in working capital conditions and L&T expects to maintain the current 12.7% net working capital to sales levels in FY25 as against its initial guidance of 15%.

Margin pain

However, margin may remain a sore point. L&T maintained its 8.2-8.5% P&M margin guidance for FY25, which is flattish year-on-year. A worry here is that recent large order wins may be margin dilutive. “Both of these orders may have a margin profile lower than the segment margin―the BTG power order was won by the L&T-MHI JV and the large solar power + BESS project may have sizable pass-through elements," said Kotak Institutional Equities. The brokerage has cut its FY25 margin estimate by 20-40 basis points. One basis point equals 0.01%.

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P&M Ebitda margin at 7.6% for the core business was largely flat year-on-year and below analyst estimates, dragged by energy and infrastructure projects. 90% of the domestic backlog is infrastructure and energy, the management said.

Meanwhile, the L&T stock has declined by 8% so far in FY25, compared to benchmark Nifty50’s 5% returns. The company’s muted H1FY25 primarily due to subdued government spending in an election year weighing on order prospects, has kept investors away. Execution is paramount ahead. A key trigger for L&T could also be reducing exposure to non-core assets such as the Hyderabad Metro Project.

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