L&T: Orders come in handy

A strong order book should stand engineering giant Larsen &Toubro in good stead even in difficult times. While the management has indicated that there is a ‘definite slowdown’, the December 2008 quarter saw orders worth Rs 14, 620 crore. That may be just a 12 per cent y-o-y increase, but it’s on a high base.

Nevertheless for the nine months to December 2008, orders have grown at a strong 30 per cent to Rs 68,800 crore, which should ensure that the company has its hands full at least for 2009-10 and some part of the following year.

Even if some projects don’t take off, the portfolio is fairly diversified -- across power, hydrocarbons and infrastructure -- and does to some extent help de-risk the revenues. However whether L&T will be able to repeat the 35 per cent growth in revenues, which it should achieve this year, is hard to say even though the management believes the order flow should continue to be reasonably good for the next six months.

As the management itself says, much would depend on how the global economy fares. Moreover, the outlook for the Indian economy hasn’t improved yet. Also, why L&T doesn’t want to chase volumes but wants to focus on margins in such a challenging environment is not clear. In the December 2008 quarter, the operating profit margins remained stable sequentially at 8.8 per cent.

Given that interest costs are easing, working capital costs should come off, helping margins to at least remain stable at these levels, though it’s unlikely they will expand significantly. Given its scale and because 70 per cent of the order book is protected from price escalation, L&T is better placed than its rivals to combat a slowdown.