Larsen & Toubro: No slowdown in order inflows

Despite a slowdown in the capex cycle, the company manages to grow core business profitably

Markets like nothing more than a positive surprise. And, engineering conglomerate Larsen & Toubro (L&T) has managed to quell most of the market’s concerns with its healthy second quarter numbers. L&T has reported 17 per cent year-on-year (y-o-y) sales growth of Rs 13,328 crore and a stunning 30 per cent growth in order inflows at Rs 20,967 crore. At the end of FY12, when the company had said order inflows would grow at 15-20 per cent y-o-y, the market had dismissed it as “optimistic”. Now, it seems the optimism has sustained though the first half. In Q1, the company had reported a 21 per cent growth in order inflows.

Given the weak capex cycle, the market wasn’t expecting this kind of growth. Though the company had started focusing on international markets, not many thought it would work. This quarter’s numbers show this, too, is happening. International sales have contributed 21 per cent to total revenues in the quarter, accounting for 12 per cent of the total order book. The overall order book at the end of September stood at Rs 158,528 crore, another healthy indication.

This growth has not come at the expense of profitability. The company has maintained its operating margins at levels seen in recent quarters. The margins stood at 10.7 per cent, which is up 30 basis points y-o-y and higher than the market’s estimates. Rikesh Parikh, vice-president, markets, strategy & equities at Motilal Oswal Securities, says: “We understand that reported margins could have forex gains (of Rs 70-80 crore), given that 20 per cent of the $1.6 billion forex debt is unhedged.” Analysts are not worried about margins as growth in the company’s core business is what is more important at this point. Once industrial activity picks up, the company is expected to be the biggest beneficiary.

While there is comfort on order inflows, the known challenges continue to remain. The market would like to know how the company would reduce its funding stress for captive projects. According to Sanjeev Zarbade, VP, Private Client Group Research, at Kotak Securities: “Key challenges include, replacing captive orders, which were 15 per cent of order intake in FY12, as the company is reluctant to commit further capital on infrastructure development, weak industrial capex cycle and sluggish ordering of road projects by NHAI.”