Larsen & Toubro: Orders aplenty

After a lull in the March quarter, orders are flowing in for the engineering company.

The Larsen and Toubro (L&T) stock has had a strong run gaining 142 per cent since April this year compared with 68 per cent rise in the Sensex. That’s not surprising as order inflows have been fairly strong for the engineering and construction (E&C) major — in the last couple of months orders worth more than Rs 11,000 crore have been announced with wins from both the public and private sectors.

Bulk orders seem to be flowing in from the oil and gas, power and roads sectors and given the government’s renewed thrust on infrastructure the momentum should sustain. As such, new orders are likely to increase by about 20 per cent in the current year over 2008-09.

Order inflows in the June 2009 quarter, at Rs 9,570 crore, were down 22 per cent year-on-year and adjusted for captive orders, the fall was even sharper. Nevertheless, the order backlog at the end of the quarter was close to Rs 72,000 crore, up 23 per cent year-on-year.

For all this, the growth in revenues this year could be a subdued 16-17 per cent; the increase gross sales, at just 6 per cent in the June 2009 quarter, to Rs 7,430 crore was disappointing. However, operating margins expanded 115 basis points, driven by the E&C business and also by the fact that several projects reached the threshold after which profits are recognised.

With the new business expected to be fairly profitable at 10-11 per cent, analysts estimate L&T’s margins could sustain for a year or so though competitive pressures could pressure margins thereafter. As such earnings are expected to grow by a compounded 18-20 per cent between 2009-2011.

The stock is a good play on India’s infrastructure growth and the upswing in the capital expenditure cycle since it has an exposure to a whole host of high growth segments including power and hydrocarbons.

At the current price of Rs 1,644, however, the stock trades at close to 21.5 times 2010-11 estimated earnings and at a fairly steep premium to the market.