L&T: Holding up in tough times

Last Updated: Fri, Dec 14, 2012 04:39 hrs

Larsen & Toubro (L&T) has continued to surprise the market with its steady order inflows this year. At the start of the year, when the company had conveyed that it would increase its focus on the hydrocarbon sector and expand its geographical footprint as part of its de-risking strategy, few analysts bought it. The Street was expecting L&T to miss its guidance on order inflows. This perception has changed in recent times.

In the first half of the year, L&T reported a 26 per cent year-on-year growth in order flows at Rs 40,600 crore. So far in the current quarter, it reported order inflows of nearly Rs 7,000 crore, driven mainly by the construction segment. Many have questioned the sustained order inflows in these times when orders for the entire infrastructure industry have dried up. L&T's financial strength is what has helped it improve market share in the infra business, as other players are highly leveraged. The market has been expecting a 50 basis points (bps) decline in profitability as the company was bidding for global projects at lower margins. However, analysts don't expect a major decline in profitability in FY13 now. Antique Stock Broking believes incremental order flow in the past few quarters, led by the infrastructure segment, is not margin dilutive. Stable raw material prices may also help stanch margin erosion in FY14.

While stretched working capital and increased funding needs continue to pose challenges, L&T's overseas foray may not have been a runaway success, but the company is bidding for global contracts at margins which are 100-150 bps lower than competition. While this would reduce margins in the near term, analysts say it would help diversify its revenue mix. Motilal Oswal estimates the overseas business to contribute 28 per cent of profits in FY13 and 32 per cent in FY14, up from 21 per cent in FY12. This would be driven by higher contribution of overseas service business and growth in new geographies.

Another big factor is L&T's ability to double its market share. In the previous capex cycle, its domestic revenues were 1.2-1.5 per cent of India's gross fixed capital formation (GFCF), which improved to 2.3 per cent in FY12. Analysts now believe that L&T could raise it to three per cent of India's GFCF. On the downside, its stretched working capital requirements will continue to be a challenge. Turnaround in its loss-making arms - L&T Nuclear Forgings and L&T Shipbuilding - will also be critical.

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