L&T At Risk Of Missing Its Full-Year Order Inflow Guidance

Larsen & Toubro Ltd. has bagged only three orders in the ongoing quarter ending December, heightening the risk of missing the full-year guidance as India’s economy struggles to rebound from a prolonged slowdown.

While the nation’s largest engineering company doesn’t disclose exact value of the orders, it categorises them in a broad range. L&T received two ‘significant’ construction orders in the range of Rs 1,000-2,500 crore each, and one ‘mega’ hydrocarbon order worth more than Rs 7,000 crore, according to its filings. That’s Rs 9,000-12,000 crore worth of orders—or an average of Rs 10,500 crore—so far this quarter.

The conglomerate, considered a barometer for private investments, requires more than Rs 1 lakh crore worth of orders in the second half of the fiscal—nearly half of the full-year guidance—to meet its forecast of 10-12 percent growth in order inflows. That’s when GDP growth fell to its lowest in six years in April-June and is estimated to further slip in the quarter ended September as consumption and private capex has declined.

While the first half of the year was driven by chunky hydrocarbons, private sector capex has completely halted, Lokesh Garg, analyst at Credit Suisse, said in a note, pointing out how tough it will be for L&T to meet its forecast despite its management’s optimism. State government orders have been significantly slower this year so far, the brokerage said. “Given that states have been contributing about 45-50 percent of order inflows, it may open a risk on order inflows for FY20 and FY21.”

Credit Suisse downgraded the stock a notch and cut the target price by 16 percent.

Emailed queries to L&T remained unanswered. BloombergQuint will update the story once the company responds.

The management, after the second-quarter earnings, acknowledged tepid private investments and contraction in economic activity. Order inflow from the core infrastructure business slipped 33 percent over a year earlier in the second quarter because of deferrals and delays. Infrastructure constitutes 71 percent of the orderbook for L&T. Other segments like power, heavy engineering as well as defence also saw contraction in order flow, with hydrocarbons driving growth.

Orders worth Rs 16,000 crore from Andhra Pradesh and the coastal road project in Mumbai currently are slow-moving due to state-government and environmental issues, the company said. It, however, maintained the full-year forecast.

With private capex remaining muted given the low capacity utilisation, major order deferrals could pose a risk to the order inflow guidance despite the optimism, Atul Tiwari, analyst at Citi, said in a report. Among the key large projects, the high-speed rail ordering would likely be postponed compared to what L&T had envisaged earlier, it said.

If L&T were to miss the order forecast, that won’t be a first. The engineering company has met its guidance only once in the past six years in 2018-19.

Shares of L&T have fallen 12 percent from the September highs. It’s down 7 percent year-to-date compared with a 11 percent gain in the benchmark Nifty 50. The construction major is trading at a price-to-earnings ratio of 16 times compared to its five-year average of 22 times.

Yet, despite acknowledging weakness, brokerages remain bullish on the stock. 37 of the 41 analysts tracking L&T have a ‘Buy’, and two each suggest ‘Hold’ and ‘Sell’, according to Bloomberg data. The average of 12-month target estimates implies an upside of 27 percent.

While Citi, Bank of America Merrill Lynch acknowledge macro weaknesses and a slowing order inflow, they recommend buying the stock citing valuations and optimism over the second half.

• Macquarie said concerns over macro and the fiscal deficit seem to be clouding the near-term view on the stock despite strong order inflow and execution performance.
• Macquarie termed L&T an ‘Asia Marquee idea’ with opportunity to buy a cyclical stock at the bottom of valuation and the cycle.
• BoFA ML upgraded the stock to ‘Buy’ in November saying its order book gives strong visibility to its near-term earnings growth.
• Citi, which resumed coverage, called it the top pick in India’s industrial and infrastructure space.

Ambit Capital, however, maintained its ‘Sell’ call citing a decline in order flow and elevated working capital. Domestic order flow remains muted while the management agreed that slowing public orders do present some downside to their guidance for FY20, Varun Ginodia, analyst at the brokerage, said in a report. Government capex would likely see a moderation on the back of strained fiscal situation, worsening order inflows, he wrote.