PremiumMUMBAI/BENGALURU : Larsen & Toubro Ltd’s (L&T’s) December quarter (Q3FY22) results are a mix of ups and downs. Total order inflows fell by 31% year-on-year (y-o-y) to about ₹50,400 crore with domestic orders remaining weak, falling by 52%. International orders segment, though, has been robust, growing by 95%.
“The lower order inflow in the domestic market is mainly because of the high base of the Mumbai Ahmedabad High Speed Rail project received last year," the L&T management said in a conference call with analysts.
Nevertheless, it helps that the outlook is strong. L&T’s total order book grew by 3% y-o-y to ₹3.4 trillion, with domestic orders contributing 76%. For Q4FY22, the order prospect is ₹3.9 trillion, the highest in the past few years. Domestic order prospects constitute ₹3 trillion of the total order book, with international orders around ₹89,000 crore, according to the management. “Q4 is likely to be a busy quarter with several order finalizations," the management said.
The management highlighted that despite decent tendering activity, award finalizations in the domestic segment were a bit muted in Q3. The award-to-tender ratio was about 40% in 9MFY22, trailing 61% in the year-ago period. On the international front, the management expects healthy traction from Gulf nations for infrastructure and hydrocarbon segments.
L&T has kept its revenue growth guidance of low- to mid-teens for this financial year. Among the dampeners, cost inflation continues to weigh on profitability. Consolidated earnings before interest, taxes, depreciation and amortization (Ebitda) margins fell 50 basis points (bps) to 11.5% in Q3 from 12% a year ago. One basis point is 0.01%.
Better overhead recoveries, project mix, and value engineering have helped offset the pressure of elevated commodity costs to an extent. That said, as around 65% of its total order book is fixed-price contracts, the management cautioned that a sharp increase in input cost can weigh on margins.
That apart, exposure to non-core assets, mainly the Hyderabad Metro and Nabha power projects, has been a sore point for L&T investors. Divestment of these assets is key for L&T to pare debt and move towards an asset light model.
Here, it helps that the Hyderabad project, seen as the next likely candidate for divestment, has recorded an improvement in ridership and operational turnaround in Q3. However, it remains loss making. Further, L&T is aiming for a 51% stake sale in the Nabha power project and is optimistic that the divestment could be completed within a year or two.
However, investors may need more convincing. “Though the ridership for Hyderabad Metro has improved, unless a clear timeline on its divestment is shared, it would remain a concern for investors," said an analyst with a domestic brokerage requesting anonymity. “Similarly, the Nabha project, which has been stalled because of carbon-neutrality issues, could take longer-than-anticipated to find buyers," he said.
To be sure, L&T shares have declined 8.7% from their 52-week highs of 18 January on NSE. In a first cut note, analysts at Reliance Securities Ltd said that while an expected pick-up in ordering activity and sharp improvement in order inflow may drive the stock’s performance in the medium-to-long term, cash burn in the Hyderabad Metro project and higher input costs are key near-term overhangs. “Healthy execution, core margin expansion, prudent capital allocation and improving return ratios should drive about 27% earnings compound annual growth rate over FY21‐24E," said analysts from Dolat Capital Market Pvt. Ltd in a report on 29 January.
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