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The June-quarter earnings of Larsen & Toubro Ltd (L&T) were a mixed bag, with more misses than hits.

Net profit at 1,170 crore was 22% below consensus estimate. Lower other income and higher taxes led to the miss even as operating performance was largely in line with expectations. Further, the second wave impacted the ordering environment leading to deferment in tendering and award activity.

Despite the low base, L&T’s overall order inflows grew 13% year-on-year (y-o-y), of which core orders grew only 10% y-o-y. Core order inflow at 15,100 crore in Q1FY22 is still far below the pre-pandemic Q1FY20 levels of 30,000 crore. L&T’s domestic orders grew 23% y-o-y while international orders fell 29%.

Slow revival
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Slow revival

In this backdrop, L&T investors can seek solace from the management’s upbeat commentary on order inflows. In a post-earnings conference call, it said ordering activity during Q1FY22 remained healthy in metro, rural water supply, minerals and metal, power T&D and hydrocarbon offshore sectors.

The management indicated the bid pipeline improved sequentially, with the overall pipeline for the remainder of the year at 8.9 trillion. The infrastructure sector’s prospects stand at 6.4 trillion, up 33% y-o-y, while the hydrocarbon segment’s prospects have improved to 1.8 trillion, it said. L&T’s management reiterated that it expects FY22 consolidated order inflows and revenues to grow in low to mid-teens.

Analysts say L&T’s strong bid pipeline is encouraging, but faster conversion into final awarding holds the key to meeting the guidance.

“L&T is well-placed to cover up for a weak start as the ordering prospects pipeline at end-June 2021 is up around 40% y-o-y," said analysts at Kotak Institutional Equities. The domestic brokerage house estimates that a 15% strike rate will make L&T grow both its order inflows and order backlog in excess of 10% in FY22. “This will enhance prospects of a healthy double-digit growth in revenues for L&T beyond FY23," according to the Kotak report.

Apart from order conversion, another key monitorable for the stock remains the monetization of non-core assets, analysts said. These include the Nabha Power and Purvanchal power plant, 51% stake in L&T IDPL and the Hyderabad Metro. The firm’s management said Hyderabad Metro’s daily passenger traffic in Q1 was 55,000 on average and had risen to 130,000 in July. While L&T is still looking for an investor for this project, it did not give any material update on refinancing of debt.

Analysts at Ambit Capital Pvt. Ltd expect the loss-making Hyderabad Metro to remain a drag for L&T as it will need more capital injection in FY22. They say that ridership is still significantly below pre-covid levels of 400,000 and optimum levels of 800,000. They anticipate further capital infusion of 2,500 crore by L&T into this project, taking total liquidity support to 5,000 crore.

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