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    L&T’s underperformance with Sensex to narrow

    Synopsis

    The company has an order backlog of Rs 3.03 lakh crore at the end of March.

    Agencies
    Order inflow rose 9 per cent year on year to Rs 1.86 lakh crore, led by the growth in overseas orders.

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    ET Intelligence Group: Concerns over curtailed capex caused de-rating in the stock of Larsen & Toubro in the past three months, with valuations plunging to nine times the forward earnings in the last week of March — the lowest in a decade. That precipitate decline is set to reverse soon.

    The risk of order cancellations by its clients appears to be much less than anticipated earlier and financial performance in the March quarter was quite commendable in these challenging times. This could narrow the company's underperformance with Sensex.

    Chief Executive Officer SN Subrahmanyan told analysts and investors that the management has not received any indication of delay or postponing of projects by governments. India’s northern and eastern states were more proactive to start projects to provide employment to migrant labour. More than 80 per cent of domestic orders are by government institutions. So, the fiscal position of the government plays a pivotal role in domestic order executions.

    The company has an order backlog of Rs 3.03 lakh crore at the end of March, equivalent to two years of revenues. Unless there is more business disruption due to the virus, the company sees the entire remaining order backlog as executable.

    In a departure from customary revenue and order inflow guidance at the beginning of the fiscal year, the company did not offer any outlook due to the uncertain business environment. But L&T sees sizable business prospects for incremental inflows from civil infrastructure, water, solar and heavy engineering projects. It is the lowest bidder in several large value orders, both at home and overseas, and these are expected to be awarded in the next few months.

    The hydrocarbon segment, which recorded 15 per cent revenue growth in the March quarter, is expected to see inflow traction from the second quarter. The construction equipment business could offer revenue potential from the last quarter of this fiscal after the government opened mining to private enterprises.

    Order inflow rose 9 per cent year on year to Rs 1.86 lakh crore, led by the growth in overseas orders. To reduce dependence on the Gulf, L&T has been consistently increasing exposure to Africa. Curbs due to the lockdown in African countries have been fewer than in the Gulf and the labour shortage issue is likely to be resolved in 15-20 days. Besides, competition for bids is also set to reduce.

    L&T’s commentary implies that the risk of any slippage on the current order backlog will be limited, although social distancing norms at sites could affect the pace of execution. The Street has already pencilled in a 10-12 per cent revenue decline for FY21.

    With investor focus shifting to the pace of execution, P/E multiples could gradually gravitate toward the long-term average. The stock is trading at 13.5 times its one-year forward earnings, which is a 36 per cent discount to its long-term average of 21.3.

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    1 Comment on this Story

    Leon Fernandes223 days ago
    very promising company of the future.
    Read before you invest. Insights on Larsen & Toubro Ltd.. Explore Now
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