LT Set to Surprise Dalal Street with Robust Q2 Results

After an ordinary year, Larsen & Toubro (LT) – India’s largest infrastructure company, is likely to be back on the radar of investors, all thanks to a pickup in order inflows and execution. The pressure on balance sheet seems to be easing with working capital as a per cent of sales peaking out with the proceeds it got from LT Infotech and LT Technologies’ IPOs.

LT may surprise the Dalal Street on its order inflows in Q2, given that the orders announced till the beginning of October indicate a growth of 34 per cent YoY to about Rs 16,900 cr. These orders are majorly from urban infrastructure, metros, power and building projects. 

Data since FY14 displays that the order registered to the stock exchanges, as and when the firm bags one during any quarter, is typically 2/3^rd of the total order shown in final quarterly numbers. The difference between the order values is because of many customers not revealing their names, and also due to some orders being strategic in nature. Therefore, many orders that are bagged by LT during the quarter aren’t reported on the exchanges as and when it gets one but it does reflect in the quarterly statement of the firm.  

As far as the overseas order inflow front is concerned, orders are likely to be steady owing to transmission and distribution, and defense orders from Vietnam. However, because of the implementation of the novel accounting standards, the company shall now be able to show the order inflows only in proportion to its share in the JV, this may decrease its extent of order inflow gains.

The company has guided for order inflow growth of 15 per cent, revenue growth of 12-15 per cent, and margins improvement of 50 bps – basis points for the current financial year. Even the execution side is expected to enhance, all thanks to the low base of the previous fiscal, the amount of backlog of orders, and a pickup in some large projects like DFCC – Dedicated Freight Corridor and power. Also, the revenue traction in Middle East has been encouraging owing to little cost-cutting in the infrastructure space. The firm has been confident of recovery in the hydrocarbon segment. 

The Dalal Street has been pegging a revenue growth of 10 per cent and 12 per cent for the present and the next fiscal year, and a pickup in domestic execution may drive earnings growth. Also, cut in the benchmark interest rate by the RBI and lower inflation are likely to enhance financials of its clients. This could boost LT’s revenue growth and ease working capital cycle. Market analysts believe that LT’s working capital requirements are peaking out with high EPC cash flows and asset sales. It has divested close to Rs.3,600 cr of equity value by completing the sale of Elante mall, LT Infotech, and LT Technologies’ IPOs and selling general insurance. Besides this, there are the potential sales of Kattupalli port, LT Seawoods, and road portfolio queued up.

The combined impact of both the assets sale and lower working capital shall drive higher cash flows and result in higher dividends.