Markets
Larsen and Toubro: Several positives, limited comfort
Summary
- L&T’s order book grew 11% y-o-y in Q2 to ₹3.3 trillion, with the order book-to-revenue ratio at 3.2X
- Order inflows excluding services was around ₹30,000 crore, led by orders in hydrocarbon biz
There were many bright spots in the September-quarter earnings of engineering and capital goods major Larsen & Toubro Ltd (L&T). For instance, the operating performance of its core business improved despite commodity inflation. Secondly, the pace of execution has started recovering with labour availability issues behind.
Most importantly, its order book grew 11% year-on-year (y-o-y) in Q2FY22 to ₹3.3 trillion, with the order book/revenue ratio at 3.2 times. Overall order inflows grew 50% y-o-y in Q2FY22 to ₹42,100 crore. Analysts point out that excluding services, order inflows at around ₹30,000 crore was a positive surprise and was led by high-value international orders won in the hydrocarbon division.
That said, a break-up of the order inflows offers limited comfort.
L&T’s order inflow disappoints after adjusting for a large international order, said analysts at Motilal Oswal Financial Services Ltd. That is because out of the overall order inflow, the core E&C orders grew merely 73% or around 80% of Q2FY20 level. Its domestic core E&C orders were disappointing, up merely 15% y-o-y, added the Motilal report. Award tendering during the quarter was up 19% y-o-y but the finalization of projects dropped 22% y-o-y.
In a post-earnings conference call, the management indicated a healthy prospect pipeline of ₹6.83 trillion, up 12% y-o-y. This is spread across domestic and international verticals of around ₹4.7 trillion and ₹2.1 trillion, respectively. The management further said that infrastructure segment order prospects stand at ₹5.3 trillion spread across buildings and factories, transportation, power transmission & distribution and material handling. Hydrocarbon prospects stand at ₹1.2 trillion with significant proportion from international geographies, the management added. Further, a large part of the domestic order book of ₹2.5 trillion is coming from public sector undertakings (PSUs) with around 42% share followed by the states, centre and the private sector, the management said.
“The strong bid pipeline is encouraging, although a faster conversion to final awarding holds the key to the company meeting the guidance of a low-to-mid-teen growth in order inflow," added the Motilal report.
Also, with the labour availability at sites gradually improving to pre-covid levels and projects crossing margin threshold levels, L&T is confident of meeting its guidance of 13-15% excluding services sales growth with 10% Ebitda margins. Ebitda is short for earnings before interest, tax, depreciation and amortization. “The implied ask rate for growth is only 6% for 2HFY22 over 2HFY21 to achieve its guidance which doesn’t seem aggressive," noted analysts at JM Financial Institutional Securities Ltd.
Apart from the order inflow trajectory, another important driver for the L&T stock remains the sale of non-core assets. Higher exposure to unrelated business segments has been a sentiment dampener for L&T investors.
Sharing its monetization plans, the firm’s management said that it is continuously exploring offloading stake in Nabha power and IDPL. As far the Hyderabad Metro project is concerned, the company expects to reach some closure on the project’s refinancing by March 2022. The management said that ridership levels have improved to 1,46,000 passengers per day in Q2FY22 from 55,000 passengers per day in Q2FY21 and the current ridership stands around 190,000-200,000 passengers per day. However, interest outgo continues to remain high at ₹3.5 billion per quarter for the project, the management said.
According to the management, the real estate monetization also provides a funding avenue for the project and out of the total amount of ₹2,000 crore set aside for funding support for Hyderabad metro, L&T has already provided for ₹1,200 crore loss funding support during H1FY22 and expects ₹1,000 crore to be provided during 2HFY22.
“Sustained execution on non-core exit, resolution for Hyderabad Metro and other concessions remain key to stakeholder perception management, apart from cyclical tailwinds," analysts at Edelweiss Securities Ltd said in a report.
Reacting to the earnings, the L&T stock rose around 3.5% intraday on the NSE on Thursday. So far in this financial year, shares of the company have risen by 43%, largely in line with sector index BSE Capital Goods index. Apart from the aforementioned factors, investors in the stock are awaiting the company’s five-year strategic plan which is likely by Q4FY22 where the company would reinforce its focus on improving return ratios at a consolidated level.
