L&T: Engineered for growth

Though orders may take their time coming, L&T is poised to cash in on higher spends on infrastructure

With signs of a recovery in the Indian economy, one would have expected engineering major Larsen and Toubro’s outlook on sales to be a little brighter than the 15-20 per cent number that it has indicated. Also, while orders are expected to come in higher by about 25-35 per cent, not a bad number in itself, the mood at the Rs 33,646 crore firm doesn’t really seem that upbeat.

The order backlog at the end of March was a little over Rs 70,000 crore. In all fairness, the company is probably waiting for the new government to move ahead on infrastructure projects and isn’t willing to bet on a quick revival in capital spends by the private sector. Also, a few orders are likely to be delayed and some of the assignments are of a long-term nature.

But since the March 2009 quarter numbers beat expectations, the Street was probably looking for more. L&T managed to leverage the strong 24 per cent rise in revenues to post fairly strong operating margins at 13.9 per cent , up 70 basis points year-on-year. With a little help from other income, the pre-exceptional net profit was up a good 30 per cent. In the current year, the company is expected to turn in revenues of close to Rs 40,400 crore and a net profit of around Rs 3,100 crore.

The company’s earnings should grow at 20 per cent in each of the next two years since it is in a good position to cash in on the imminent economic recovery.

Moreover, its forays into railways, power equipment and shipbuilding too should pay off and make it a good diversified play on India’s improving infrastructure. However, the stock has rallied sharply in the last three months, outperforming the benchmark indices. At the current price of Rs 1,398, it trades at around 27 times estimated 2009-10 earnings and is somewhat expensive.