With domestic slowdown, global order wins are helping L&T stay on track

Since the start of the week, Larsen & Toubro has been adding to its order book in both the domestic and international business.
 
While its orders at home in power, water treatment and hospitals are incremental, the announcement of a $1 billion (over Rs 7,000 crore) order for a gas field development in Algeria is considered the most significant. According to CLSA analysts, this order means L&T will beat its 2018-19 order book growth forecast, at a time when domestic order flow is declining.
 
The first half of FY19 (April-September) had seen strong flow in domestic orders, largely driven by those from government. The pace became slower in the December quarter and is likely to taper further, given the coming elections. Notably, domestic private sector capital expenditure (capex) remains sluggish. Hence, the flow of international orders is now compensating and it is on this that analysts are betting on to achieve the earlier order inflow forecast.
 

In the near term, order finalisation in the Indian market (particularly large orders) is expected to stay muted, say analysts at Edelweiss. In this scenario, L&T seems to have shifted its focus to bagging international orders (it needs Rs 40,000 crore, ex-services, to meet the lower end of the forecast).
 
Notably, of the four it got in the latest quarter, two are from abroad (versus 83 per cent and 76 per cent domestic proportion in the March ’18 quarter and year-to-date FY19, respectively), note analysts.

 
L&T’s diverse product mix and presence in West Asai/North Africa will help it tide over a potentially volatile domestic market in the first six months of 2019, say analysts at CLSA. They add that L&T is a good proxy for domestic capex and has a credible strategy to improve both growth and return on equity. In the December quarter, L&T had seen orders decline by 12 per cent year-on-year to Rs 42,200 crore.
 
However, inflow in the first nine months (till end-December) of FY19 stood at Rs 120,200 crore, up 16-17 per cent over a year. Given strong growth in these nine months, led by government capex and some pick-up in private capex, analysts estimate L&T needs only two to three per cent growth in the March quarter order inflow to achieve its 10-12 per cent growth here which it had forecast for FY19.

Thus, while international orders are making up for decline in domestic ones, analysts also feel this latest big order reinforces confidence in L&T’s capability to execute large and complex projects in a highly competitive environment. The company won this turnkey order in competitive bidding.
 
The other positive is the strong execution which is driving its earnings growth. In the December quarter, this helped it to grow its revenue by 24 per cent year-on-year and operating profit by 27 per cent. While its 12-15 per cent sales growth forecast means the March quarter might see flat growth, some analysts feel the management is being conservative. However, most brokerages are cautious, given the impact of slowing government spending due to the elections. This could lead to some slowdown in execution, as some of this is also dependent on payments being received on time.
 
Still, after the global order wins, analysts at Edelweiss believe L&T’s improving ability to adapt to changing industry dynamics by constantly re-engineering its core reflects a change in DNA and warrants a re-rating of the stock.