Barring order inflow, L&T misses key expectations

While the Dec '15 quarter may have offered relief on order inflows, the firm still has a tall target to achieve

Much to the surprise of the analysts, the stock of Larsen & Toubro (L&T) gained over two per cent on Friday in anticipation of positive order flows in December quarter (Q3 of FY16). Though L&T did live up to this expectation, there were just few positive takeaways in the Q3 results.

Order inflow (at Rs 38,528 crore), mainly driven by infrastructure segment, was higher by 11 per cent year-on-year; way ahead of the Street’s estimates of Rs 25,000-26,000 crore. Thus, order book too, at Rs 2,56,000 crore, recorded a robust 14 per cent growth, with international orders totalling Rs 70,000 crore or 27 per cent of the total order book.

However, the quarter gone by saw L&T missing analysts’ estimates on many other fronts. Firstly, consolidated revenues at Rs 25,829 crore (up eight per cent year-on-year) and operating profit at Rs 2,650 crore (down 8 per cent year-on-year) missed Bloomberg targets of Rs 26,355 crore and Rs 3,082 crore respectively. Thus, operating margin fell sharply to 10.3 per cent in Q3 of FY16, down 186 basis points year-on-year. Operating margin of its core infrastructure and engineering business also dipped from 10 per cent in Q3 of FY15 to 7.4 per cent in Q3 of FY16.

Had it not been for treasury gains and lower interest cost, net profit for the quarter at Rs 1,035 crore would have grown at lesser than 19 per cent year-on-year. Nevertheless, it was still lower than estimates of Rs 1,060 crore.

With the management sounding cautious about the near-term, and largely betting on public sector spends to achieve its order targets for FY16, analysts feel that tough days may persist for L&T.

First, from five to seven per cent order flow growth guidance provided by the management in October 2015 (down from earlier guidance of 10 per cent increase), L&T has once again lowered its order inflow targets and expects to just about maintain order flows at FY15 levels (Rs 1.55 lakh crore). But this still means that L&T needs to seal orders of at least Rs 61,000 crore in Q4 of FY16 to meet the target. Rohit Natarajan of IDBI Capital points out that this would require the company to achieve 28 per cent year-on-year growth in order inflows in March’16 quarter as inflows in Q4 of FY15 were Rs 47,600 crore; a tall task ahead for the company.

Another pain point is the declining realisations. While the management attributes the fall in margins seen in Q3 of FY16 to revenue threshold not yet met for some on-going projects, concerns on slow order movement and execution delays remain. As the management warns for margins to remain under pressure, L&T’s stock may see some more downside (it is already down 37 per cent in last six months versus 11 per cent decline in Sensex), given that it has historically operated at 14 to 16 per cent margins.