Larsen & Toubro: Order book woes

The Street is worried about a relatively weak order book

With decisions on some contracts deferred, order inflows for engineering major Larsen and Toubro were lower by about 20 per cent year-on-year to Rs 9,600 crore in the June 2009 quarter.

The Street is somewhat concerned about order flows and the guidance for the current year; an increase of just 25 per cent, analysts point out, doesn’t suggest any major upturn in business.

That’s one of the reasons why the L&T stock fell nearly 4 per cent today to close at Rs 1,378. The current order book of close to Rs 72,000 crore is fairly robust and it’s possible that the company could win a couple of big orders from ONGC later in the year. Meanwhile, net sales for the June quarter were up just 11 per cent to Rs 7,363 crore. The management says revenues for the year should grow 15-20 per cent. The growth could be back-ended with a pick-up in the second half of the year.

Also, an operating profit margin of 10.7 per cent was a tad disappointing and lower sequentially. This was despite the fact that manufacturing, construction and operating expenses as a share of net revenues were lower by about 200 basis points on the back of lower raw material costs. Interest expenses were up just 15 per cent and hurt the profit before exceptionals. For 2009-10, the operating margin is expected to be in the region of 11 per cent.

At Rs 1,378, the stock trades at a price to earnings multiple of around 23 times estimated 2009-10 earnings, which makes it somewhat expensive given that earnings will probably grow just about 20 per cent this year.

The stock could remain at these levels until the management improves the revenue guidance or there are clear indications that orders are picking up.