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L&T order book to sustain revenue growth, stock

Last fiscal, L&T delivered on its stated guidance of order inflows and revenue growth.

, ET Bureau|
Last Updated: May 13, 2019, 08.32 AM IST|Original: May 13, 2019, 08.32 AM IST
ET Intelligence Group: Larsen & Toubro (L&T) is a proxy for more complex forward-looking metrics than routine industrial activity. So, its double-digit order inflow guidance when factory output indices aren’t exactly setting the charts on fire has drawn investors, explaining its 5 per cent outperformance relative to broader benchmarks in the past three months.

And the trend could last if order inflows remain strong. PE multiples are reasonable and RoE at India’s biggest engineering company is improving.

Last fiscal, L&T delivered on its stated guidance of order inflows and revenue growth, even though operating margins remained a tad soft. Order inflows increased 16 per cent to Rs 1.76 lakh crore in FY19, four percentage points higher than what was projected earlier. Overseas orders in the fourth quarter helped offset slowing inflows locally. International order inflows more than doubled to Rs 17,700 crore, underpinned by the hydrocarbon segment. By contrast, local order flows dropped 5 per cent .

So, the share of international orders in the total flows rose to 32 per cent in the last quarter of FY19, compared with 25 per cent in the first nine months of FY19. In the first nine month of FY19, the local order book expanded 20 per cent , nearly three times the rate of growth overseas.

Locally, orders from the private sector have begun to trickle in. This segment accounted for about 17 per cent of the total, analysts believe, from lows of 7-8 per cent in FY17. State governments now account for 42 per cent of the inflows. These projects are aimed at boosting urban infrastructure, enhancing water supplies and building powerlines.

The outstanding order book expanded 12 per cent to Rs 2.93 lakh crore, which provides revenue visibility for the next two years. According to Bloomberg consensus estimates, L&T’s revenue is expected to rise 12 per cent and 12.7 per cent , respectively, in FY20 and FY21. L&T has projected revenue growth of 12-15 per cent for FY20, in line with Street estimates. Hence, consensus revenue growth may remain unchanged after the March quarter results. Infrastructure and hydrocarbon segments, which together accounted for 61 per cent of revenue, rose 12 per cent and 22 per cent due to faster execution.

L&T is trading at 18.5 times its twelve-month forecast earnings, translating into a 20 per cent discount to its five-year average.

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