L&T: Healthy pace of project execution, cost initiatives may drive profits

The recent stock price correction offers a good entry point for investors

Larsen and Toubro (L&T) remains in news on account of regular order inflows. Rising order flows, healthy project execution, cost-cutting initiatives and improving capital allocation are keeping analysts positive on L&T. The recent stock price correction, they add, offers a good entry point for investors.

With order inflow of Rs 49.2 billion in the construction as well as power transmission and distribution segments since the start of October, L&T is maintaining momentum witnessed since the start of FY19.

The June quarter saw a 37 per cent year-on-year (YoY) jump in new orders, and analysts peg September quarter growth at 86 per cent YoY (Rs 219 billion, according to Elara Capital).

With L&T’s order backlog (or orders pending execution) standing at multi-quarter highs (at least since FY15) as of June, the trend in Q2 and thereafter enhances earnings visibility. Analysts also believe L&T is on course to meet its FY19 guidance of 10-11 per cent growth in order inflow, and 12-15 per cent increase in revenue.

As seen in the June quarter, execution of projects is also expected to sustain the momentum, with need for timely completion given the upcoming elections. L&T’s diversified order book is currently being driven by government orders as private capex is yet to pick up.

Not surprising then, that the Q2 performance is expected to be good. Kunal Sheth at Prabhudas Lilladher expects healthy execution led by the Engineering and Construction, and services businesses, leading to 12 per cent YoY revenue growth and margins improvement of 30 basis points due to operating efficiencies and better profitability of its services business.

With L&T’s cost-cutting initiatives expected to accrue further benefits, analysts expect earnings and return ratios to improve.

L&T continues to focus on its strategic plan of achieving profitable growth and improving return on equity (RoE) in the medium term as well as capital allocation, aided by exit from non-core areas (recent one being sale of electrical and automation business). L&T’s Rs 90-billion share buyback plan reiterates its commitment towards its five-year plan to improve its RoE to 18 per cent by FY21, say analysts at Motilal Oswal Securities.

An analyst at a foreign brokerage says that as improved execution and cost cutting drive earnings and RoE, he sees L&T’s earnings grow 19 per cent annually during FY18-20.