After remaining subdued initially, the stock of Larsen & Toubro (L&T) gained 2.75 per cent intra-day on Thursday as the company belied Street’s fears about likely order inflow miss in the December 2012 quarter. Though revenues were lower than expectations, the company’s future guidance and commentary regarding early signs of revival in infrastructure spending were positive. Going ahead, if India’s economic activity and investment spend pick up and L&T’s focus on international markets continues to reward as desired, it should boost sentiments. But for now, and even as valuations appear reasonable, analysts are cautiously positive about L&T’s near-term outlook.
Q3: Order inflow surprise positively
L&T reported order inflows of Rs 19,545 crore (up 14 per cent year-on-year) as against analysts’ expectations of Rs 16,000-18,000 crore, for the December quarter. This has helped the company corner Rs 60,100 crore worth new orders in the nine months ended December 2012, which is on expected lines and commendable given the weak investment climate. However, the growth was much lower than the 25.6 per cent increase seen in the first half of FY13, indicating signs of pressure. Also, the order book includes road project orders received from GMR and GVK, who are reportedly seeking an exit from a few large projects. Any cancellations or delays in the same could affect L&T’s order book by about three per cent (about Rs 5,000 crore).
For now, the company has maintained its 15-20 per cent order inflow growth guidance for FY13. Analysts are confident that the company should be able to achieve at least the lower end of the band. The confidence stems from the company’s increasing focus on international markets, whose share in order inflow stood at 22 per cent in the December 2012 quarter compared to 18 per cent for FY12. Achieving higher end of the 15-20 per cent band though, looks difficult as domestic woes continue and act as hurdles.
Says R Shankar Raman, chief financial officer, L&T, “Indian economy continues to grapple with challenges. Environment is still investment-shy, there is competition (intense overseas) and limited opportunity. Energy, industrial capex and infrastructure have not revived completely.”
| GROWTH MOMENTUM SLOWING | |||
| In Rs crore | Q3’FY12 | FY13E | FY14E |
| Revenues | 15,429 | 62,711 | 70,473 |
| Y-o-Y change (%) | 10.2 | 17.9 | 12.4 |
| Operating profit | 1,475 | 7,124 | 7,904 |
| Y-o-Y change (%) | 9.7 | 13.4 | 10.9 |
| Adjusted net profit | 1,122 | 4,895 | 5,336 |
| Y-o-Y change (%) | 13.1 | 11.2 | 9.0 |
| EPS (Rs) | 18.3 | 79.6 | 86.8 |
| P/E (x) | - | 19.9 | 18.3 |
| Source: Company, Analysts Estimates | |||
Meanwhile, performance in the December 2012 quarter was decent as the company maintained its margins. While revenue growth of 10.2 per cent was lower than analysts’ average expectations of 14.5 per cent, thanks to slowdown witnessed by engineering and construction division, analysts’ major worry over likely slippage on order inflows has been put to ease for now. Says Viral Shah, analyst, Angel Broking, who has an ‘accumulate’ rating on the stock, “L&T posted a mixed set of numbers with decent growth on revenue and order inflow fronts.”
Sanjeev Zarbade, vice president—private client group research, Kotak Securities, adds, “L&T’s numbers at the earnings level were higher than expected but revenue growth was much lower. We continue to recommend ‘accumulate’ rating on the stock”.
The company, however, is seeing early signs of a government push on infrastructure spending. With a strong order book position (Rs 162,000 crore) it expects to sustain its growth, going ahead. Revenue visibility has also been maintained with order book to sales ratio of 2.6 times. The recent policy measures by the government are expected to improve the economic outlook, revive investments in various sectors and help rediscover growth momentum, says Raman.
After a spectacular run in 2012 (gains of 61 per cent), the stock (at Rs 1,586) has underperformed year-to-date with a decline of 2.3 per cent compared to 1.8 per cent rise in Sensex. Despite reasonable valuations of 18 times FY14 earnings, the cautious sentiment is expected to continue, at least till the macro scenario improves and trickles down to order inflows for the company. Earlier this month, Citi Research and Barclays had downgraded the stock to ‘neutral’ and ‘equal weight’ respectively, while ICICI Securities maintained its ‘sell’ rating. Even after the positive surprise on order inflow and decent performance in the December 2012 quarter, the stock may remain range-bound.