L&T: FY12 order inflows may decline 6-9%

Analysts expect revenues and inflows to contract further.

In the last six months, the Larsen & Toubro (L&T) share has fallen 32 per cent, even as the broader market is down 11 per cent. The company’s 12-month trailing price-earnings ratio stands at 17 times, down from 32 times last January, showing that investors see growth as a challenge. Though L&T is a large player in the engineering and construction space, having a footprint overseas, the slowdown in order flows has hit it hard this year. The market has beaten the stock and the company’s return on equity is unlikely to match past performance.

All sectors that drive a sizable portion of L&T’s order flow have been severely hit. The company had initially expected a 15 per cent growth in order flows but toned it down to five per cent later. According to Kotak Institutional Equities, L&T had announced order inflows worth Rs 6,500 crore after the first half of FY12. Adding this to the reported inflows of Rs 32,300 crore in the first half would take the total to Rs 38,800 crore so far this financial year. This implies an estimated requirement of Rs 33,200 crore in the remaining four months to achieve an order inflow growth of five per cent.

Analysts believe L&T will not be able to meet even its muted guidance this financial year. Going by the macroeconomic and political developments over the past two-three months, Citi expects the company to close FY12 with a six per cent fall in order intake. JM Financial has factored in a nine per cent fall. Analysts expect order inflows to remain flat in FY13, too.

Analysts are also expecting L&T to miss the revenue growth estimate of 25 per cent. Though the company maintains that 25 per cent growth is achievable, analysts see it closing the year with a 20 per cent growth in revenues. Sales grew 20.8 per cent in the first half, which means it would have to clock a sales growth of 27.5 per cent in the second half to meet its target. JM Financial has built in a revenue growth of 19.9 per cent for FY12. Given that order inflows have slowed significantly, analysts believe sales growth over FY13-14 will moderate to 11.5 per cent a year. While valuations are not expensive, analysts believe margin pressure, competitive intensity, higher working capital requirement and weak business conditions may affect performance.