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Slippage in order guidance to weigh on L&T’s performance

L&T’s stock has underperformed 12 per cent compared with the Nifty in last three months.

, ET Bureau|
Last Updated: Dec 06, 2019, 09.08 AM IST|Original: Dec 06, 2019, 08.52 AM IST
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Slippages in its FY20 order guidance, due to slower decision-making on orders and delays in megaprojects, have caused valuations to drift.
ET Intelligence Group: India’s top stocks are fetching record valuations, but the biggest engineering company in Asia’s third-largest economy is trading at levels investors would consider the most reasonable in at least five years.

Larsen & Toubro is trading at 15.75 times based on one-year projected earnings, 29 per cent lower than its five-year average, according to data compiled from Bloomberg.

L&T’s stock has underperformed 12 per cent compared with the Nifty 50 in the last three months.

Slippages in its FY20 order guidance, due to slower decision-making on orders and delays in megaprojects, have caused valuations to drift. The company management has guided for order inflow growth of 10-12 per cent for the current fiscal year. It needs to achieve order inflow worth Rs 1 lakh crore in the second half to meet its annual order inflow guidance.

But the Street is turning rather conservative, given the company’s pronounced reliance on state government orders. This segment of order inflows has turned wobbly following local elections in Andhra Pradesh and Maharashtra. State government orders have been contributing nearly 40 per cent of the total orders in the past two fiscal years.

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The contribution of state government orders dropped by 43 per cent to Rs 15,500 crore in the first half of the current fiscal. In the first half, the order inflow grew 16 per cent to Rs 87,000 crore despite the drop in the state government orders, offset largely by incremental orders from hydrocarbon and power.

That may not continue, given the lumpy nature of these orders. According to Credit Suisse, the state government capital expenditure could slow to 8 per cent in FY20 compared with 18 per cent between FY15 and FY18. The Street has so far worked on the assumption of sustainable state government orders.

Typically, the Street ascribes premium P/E multiples to long-term averages in times of robust order inflows, while the reverse is true in periods of slack. In the third quarter so far, the company won three large orders (worth Rs 1,000-2,000 crore) and one mega order (worth Rs 7,000 crore).
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