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L&T ends Q4 on a positive note

Downgrades likely as market is not convinced order flows will rise 15-20%

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Larsen & Toubro (L&T) surprised the market positively with its revenue and profit performance in the fourth quarter. The Street was expecting the company to exit the financial year with a of Rs 1,657 crore. Instead, net profit grew 24.8 per cent to Rs 1,877 crore, much ahead of a 21 per cent year-on-year growth in revenues. Analysts attribute this strong revenue growth to good execution. Not surprisingly, L&T’s shares gained two per cent on Monday.

But, that’s where the good news ends. While profitable growth is a good enough reason to cheer, there is a sharp deceleration in order inflow, down 31 per cent year-on-year (y-o-y) for Q4. The full year order flow has also seen a decline of 14 per cent. This is a big concern and will come back to haunt the company in FY13. It saw order inflows of Rs 70,574 crore in FY12, which took its order book to Rs 1,45,723 crore at the end of FY12. It has guided for order inflows of Rs 82,000-84,000 crore in FY13, which implies a growth of 15-20 per cent over FY12.

Given that order inflows have totally dried up in recent times, this guidance seems to be aggressive. Dhananjay Sinha, strategist at Emkay Global, says: “We believe the guidance on order inflows seems steep and the company will be under pressure on multiple fronts. Given that the margins have been coming down, profitability too, will be under stress in FY13. We are looking at revising the stock price downwards.” John Perincherry, senior research analyst at Asian Market Securities, also believes order inflows will remain at FY12 levels.

Even if L&T manages to execute well, maintaining this kind of growth in revenues and profit will be a challenge, believe most analysts. The primary reason is that it lacks pricing power, as most sectors it caters to are facing tough conditions. Also, rising raw material costs are not helping the situation. This trend is clearly visible in the company’s margin profile, which has been decelerating.

L&T’s margins have fallen 150 basis points y-o-y to 13.9 per cent in Q4 FY12. For the full year, the margins dropped 100 basis points at 11.8 per cent. The deceleration in margins is seen across all segments. Apart from poor pricing power, raw material costs have also risen faster than the top line. Raw material to sales ratio has deteriorated to 77.5 per cent in Q4 FY12 from 75 per cent in Q4 FY11.

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