Strong order inflow, execution likely to be positives for L&T stock

Larsen and Toubro (L&T) has beaten consensus on engineering and construction or E&C order inflow (up 64 per cent Y-o-Y) and execution (up 20 per cent Y-o-Y) in Q3FY25. Core E&C margin was flat Y-o-Y at 7.6 per cent. L&T has raised its guidance for order inflow and revenue growth. Strong inflows of Rs 98,700 crore and an order prospect pipeline at Rs 5.5 trillion have enhanced revenue visibility. However, there’s likely to be margin compression.

 

L&T reported consolidated revenue of Rs 64,700 crore, up 17 per cent Y-o-Y. Operating profit was at Rs 6,300 crore, up 9 per cent Y-o-Y and net profit at Rs 3,400 crore was up 14 per cent. The operating profit and net profit were below consensus due to lower margins.

 

In E&C, order inflows came in above estimates at Rs 96,300 crore, up 64 per cent Y-o-Y. Domestic orders at Rs 45,900 crore jumped 126 per cent Y-o-Y, international orders grew 26 per cent Y-o-Y to Rs 50,400 crore, with major orders in renewable and power transmission and distribution (T&D) business.

 

The core E&C order book of Rs 5.6 trillion is up 19 per cent Y-o-Y. Core E&C revenue came in at Rs 47,300 crore (up 20 per cent Y-o-Y). Operating profit margin at 7.6 per cent for the core business was flat Y-o-Y with contraction in Energy Projects.

 

L&T’s prospect pipeline for Q4FY25 at Rs 5.5 trillion is down 12 per cent Y-o-Y, due to a fall in hydrocarbon and carbon lite prospects. Infrastructure prospects stand at Rs 4 trillion across sectors. Energy segment prospects are Rs 1.44 trillion, entirely hydrocarbons. Hi-tech manufacturing prospects stand at Rs 6,500 crore.

 

The company is well-placed in 4-5 large domestic orders and has visibility of Rs 50,000 crore in inflows for Q4FY25.

 

L&T has raised order inflow guidance to over 15 per cent. Net working capital (NWC) is comfortable at 12.7 per cent of sales versus 15 per cent guided earlier. Margin may improve as large projects in the Middle East reach revenue and margin recognition stage. Capex in green energy, data centres and semiconductor design will be unveiled in the FY27-31 Lakshya plan. Slowdowns in order inflows, delays in completion of mega projects, a sharp rise in commodity prices, an increase in working capital, and increased competition could be downside risks.

 

For the infrastructure segment, international contributed to order inflow growth (+33 per cent), while domestic inflows declined 20 per cent Y-o-Y. The domestic: international mix stood at 58 per cent: 42 per cent. The domestic order book includes state PSUs (39 per cent) and states (26 per cent), Centre (15 per cent), and private sector (20 per cent). About 15 per cent of the order book is funded by multilateral agencies and 45 per cent is fixed price.

 

The NWC was an improvement of 390 basis points Y-o-Y, apart from gross working capital improvement and higher customer collections (Rs 59,100 crore vs. Rs 49,400 crore). L&T received incentives of Rs 300 crore for a 90,000 MTPA green hydrogen project at Rs 11.11/kg of hydrogen. In semiconductors, L&T is building designs, to be manufactured by other fabricators.

 

Domestic ordering slowed due to elections. Management sees signs of a rebound in government spending. GCC region accounts for 84 per cent of L&T’s international order book of Rs 2.37 trillion. L&T is very competitive in GCC contracts.

 

In Hyderabad Metro, loss was Rs 20,300 crore vs. Rs 25,400 crore Y-o-Y. The company expects further transit-oriented development monetisation in Q4FY25 and aims to reduce debt from Rs 12,600 crore to Rs 9,000 crore.

 

Most analysts are positive on the stock and the stock is up 4 per cent.