Are L&T’s robust order flows a sign of economic recovery?

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After two lacklustre quarters, order inflows at the country’s infrastructure juggernaut Larsen and Toubro Ltd (L&T) have gained momentum. The company’s December quarter results showed promise with order flows at Rs48,130 crore that shot past expectations on the Street. Further, the 38% year-on-year jump was a pleasant surprise compared to a worrisome 11% and 8% decline in order flows during the June and September quarters, respectively.

What’s more, the share of domestic orders has risen significantly in the quarter compared to the year-ago period. This shows the Indian economy in good light, given that L&T is the largest play on engineering and infrastructure activity in the country. A little over half of these orders poured in from the infrastructure segment with large-ticket orders from areas such as water and effluent treatment, transportation, and heavy civil engineering.

However, apart from infrastructure, segments such as electrical and automation, and power put up a dull show. Perhaps this is a sign that industrial activity is yet to bounce back. Meanwhile, order intake in hydrocarbons was robust with 34% coming from international turf as expected.

Strong order traction is the key reason for L&T’s shares outperforming benchmark indices. The Rs2.7 trillion order book at the end of the December quarter assures investors of stable revenue and profit growth ahead. On a like-to-like basis, the quarter’s revenue rose by 10%, while the operating profit shot up by 25% when compared to the year-ago period.

Undoubtedly, the infrastructure segment is the single-largest contributor to L&T’s revenue and operating profit.

Sectors such as power, heavy engineering, and electrical and automation managed to sustain profitability at the year-ago levels, while the services segment, although small, pulled off a strong double-digit margin. On the whole, L&T’s operating margin of 9.1% was a tad lower than the year-ago period and missed the Street’s estimate of 10%. However, the management explained that this only reflects the state of job mix and project completion stages during the quarter.

The conglomerate’s 48% jump in net profit for the quarter too was commendable and beat Bloomberg’s average estimate.

Be that as it may, a quarter’s surprise in order flows and performance is hardly sufficient to support a rerating in the stock. At its current price of Rs1,416, the L&T stock trades at a rich 25 times the estimated earnings for fiscal year 2019. After all, the revenue guidance is only 12% higher for FY18 with a stable profit margin. Also, the management has retained its watered-down guidance of zero-to-flat order inflows for FY18, which the conglomerate will easily pull off, given that the March quarter is a relatively good one.livemint