L&T sinks 7% as margins disappoint, weakness likely in order wins till June

The company's management indicated the pace of new orders in the domestic market had slowed and there would be weakness for the two quarters between now and June 2024 owing to the Lok Sabha elections

Shares of Larsen & Toubro (L&T) plunged 7 per cent in Wednesday's intra-day trade to Rs 3,387.40 on the BSE after the company reported lower-than-expected margins for the December quarter (Q3FY24) despite beating revenue estimates.

The company’s management also indicated the pace of new orders in the domestic market had slowed and there would be weakness for the two quarters between now and June 2024 owing to the Lok Sabha elections.

At 09:52 am, L&T was the top loser among the BSE Sensex and Nifty 50 stocks, down 6.5 per cent. In comparison, the benchmark indices were up nearly 0.1 per cent.

The stock had hit a record high of Rs 3,738.90 in Tuesday’s intra-day trade. In the past 10 months, it has zoomed 64 per cent.

For the reporting quarter (Q3FY24), L&T's earnings before interest, taxes, depreciation, and amortization (Ebitda) margin declined to 10.4 per cent from 10.9 per cent a year ago. 

The company posted a 15 per cent year-on-year (YoY) rise in net profit at Rs 2,947 crore on the back of better operational performance and more orders.

Revenue was up 18.84 per cent YoY to Rs 55,128 crore. Despite the slowdown, L&T expects to end FY24 with an order book of Rs 5 trillion and more than 20 per cent growth in its full-year order inflow.

L&T reported a 5 per cent/10 per cent miss at PBT on our/consensus estimates, despite a beat on revenues. While margin was sub-par, orders were boosted by recent wins in the Middle East, analysts at Kotak Securities said.

The brokerage has downgraded L&T to Sell (from Reduce) on expensive 33X one-year forward core EPS multiple.

It finds it difficult to be liberal on multiples, given the growing share of fixed price contracts (42 per cent versus 33 per cent earlier) and related increase in margin volatility.

It flagged the high 30 per cent share of Saudi Aramco in backlog and its reassessment of growth plans, weakening domestic orders before the start of the proposed path of fiscal consolidation and margin bottoming out at much lower levels than expected as other concerns. 

However, Motilal Oswal Financial Services expects L&T to continue to benefit from the strong addressable market in both India and international locations.

It has revised estimates to bake in improved inflows and lower margins.

“We increase our target price to Rs 4,200 based on the SOTP methodology, valuing the core business at P/E of 28x Mar’26 EPS and a 25 per cent holding company discount for subsidiaries,” it said, adding.

The higher multiple takes into account the continuously improving prospect pipeline and improvements in net working capital and RoE, despite margins being lower than guidance, Motilal said.

The company’s consolidated order book stands at about Rs. 4.7 trillion as on December 31, which puts it in a comfortable situation on project execution in an election year, where demand from government could remain subdued, the management said in the post-earnings call.

It thus expects margins to recover in coming quarters on executing legacy projects from the execution backlog.