Larsen & Toubro: Many positives, limited comforts

Most importantly, its order book grew by 11% year-on-year (YoY) in Q2FY22 ₹3.3 trillion, with an order book/revenue ratio of 3.2 times. Total order inflows up 50% year-on-year in Q2 FY22 ₹42,100 crores. Analysts say that excluding services, the order flow is around Rs. ₹30,000 crore was a positive surprise and was led by the high-value international orders won in the hydrocarbon division.

That said, the break-up of order inflows provides limited comfort.

Analysts at Motilal Oswal Financial Services Ltd said L&T’s order flow disappoints after adjusting for a large international order. This is because out of the overall order flow, core E&C orders grew only 73% or about 80% of the Q2FY20 level. Motilal’s report said its domestic core E&C orders were disappointing, growing only 15% year-on-year. Award tendering increased 19% year-over-year during the quarter, but finalization of projects declined 22% year-over-year.

In a post-earnings conference call, management indicated a healthy prospect pipeline ₹6.83 trillion, up 12% annually. It is spread over the domestic and international verticals of approx. ₹4.7 trillion and ₹2.1 trillion respectively. Management further said that the prospects for the infrastructure segment order are steep. ₹5.3 trillion spread across buildings and factories, transportation, power transmission and distribution and material management. Hydrocarbon prospects stand out ₹1.2 trillion with a significant proportion from international geographies, the management said. In addition, a major part of the domestic order book ₹The management said that 2.5 trillion is coming from public sector undertakings (PSUs) with around 42% stake, followed by states, the Center and the private sector.

“The strong bid pipeline is encouraging, although rapid conversion to the final award holds the key for the company to meet its guidance of low-to-mid-teens growth,” the Motilal report said.

Further, labor availability at sites is gradually improving to pre-covid levels and projects are crossing margin threshold levels, excluding growth in sales of services with 10% EBITDA margin to L&T 13-15 % is confident of fulfilling its guidance. Ebitda is short for earnings before interest, taxes, depreciation and amortization. To obtain its guidance, the implied asking rate for growth for 2HFY22 as compared to 2HFY22 is only 6% which does not look aggressive, said noted analysts at JM Financial Institutional Securities Ltd.

In addition to the order inflow trajectory, another key driver for L&T stock remains the sale of non-core assets. Higher exposure to unrelated business segments has been dampening sentiment for L&T investors.

Sharing its monetization plans, the firm’s management said that it is continuously exploring offloading stake in Nabha Power and IDPL. As far as the Hyderabad Metro project is concerned, the company expects some closure on refinancing of the project by March 2022. The management said there has been an improvement in the number of passengers per day in Q2FY22 from 55,000 passengers per day in Q2FY21. The current ridership is approximately 190,000-200,000 passengers per day. However, interest expense remains high ₹3.5 billion per quarter for the project, management said.

According to the management, real estate monetization also provides a funding avenue for the project and out of the total amount ₹2,000 crore set aside for funding support for Hyderabad Metro, L&T has already provided ₹1,200 crore loss fund support and expected during H1FY22 ₹1,000 crore to be provided during 2HFY22.

“Continuous execution on non-core exits, solutions for Hyderabad Metro and other concessions are the key to managing stakeholder sentiment apart from cyclical tailwinds,” analysts at Edelweiss Securities Ltd said in a report.

Responding to earnings, L&T stock rose nearly 3.5% intraday on the NSE on Thursday. The company’s shares have gained 43% so far in this financial year, mainly in line with the sector index BSE Capital Goods Index. Apart from the above factors, investors in the stock are looking forward to the company’s five-year strategic plan, which is likely to take place by Q4FY22, where the company will focus on improving the return ratio at the consolidated level.