Friday, January 29, 2016

Barring order inflows, L&T misses key expectations

Much to the surprise of the analysts, the stock of L&T gained over two per cent in trade on Friday in anticipation of positive order flows in December 2015 quarter (Q3FY16). Though L&T did live up to this expectation, there were few positive takeaways in the Q3 results.

Order inflow (at Rs 38,528 crore), mainly driven by infrastructure segment, was higher by 11 per cent year-on-year; way ahead of the Street's estimates of Rs 25,000-26,000 crore. Thus, order book too at Rs 2,56,000 crore recorded a robust 14 per cent growth, with international orders totalling to Rs 70,000 crore or 27 per cent of total order book.

However, the quarter gone by saw L&T missing analyst estimates on many other fronts. Firstly, consolidated revenues at Rs 25,829 crore (up eight per cent year-on-year) and operating profit at Rs 2,650 crore (down 8 per cent year-on-year) missed Bloomberg targets of Rs 26,355 crore and Rs 3,082 crore respectively. Thus, operating margins fell sharply to 10.3 per cent in Q3FY16, down 186 basis points year-on-year. Operating margin of its core infrastructure and engineering business also dipped from 10 per cent in Q3FY15 to 7.4 per cent in Q3FY16.

Had it not been for treasury gains and lower interest cost, net profit for the quarter at Rs 1,035 crore would have grown at lesser than 19 per cent year-on-year. Nevertheless, it was still lower than estimates of Rs 1,060 crore.

With the management sounding cautious about the near-term and largely betting on public sector spends to achieve its order targets for FY16, analysts feel that tough days may persist for L&T. Firstly, from five to seven per cent order flow growth guidance provided by the management in October 2015 (down from earlier guidance of 10 per cent increase), L&T has once again lowered its order inflow targets and expects to just about maintain order flows at FY15 levels (Rs 1,55,000 crore). But this still means that L&T needs to seal orders of at least Rs 61,000 crore in Q4'FY16 to meet the target. Rohit Natarajan of IDBI Capital points out that this would require the company to achieve 28 per cent year-on-year growth in order inflows in March'16 quarter as inflows in Q4FY15 was Rs 47,600 crore; a tall task ahead for the company.

Another pain point is the declining realisations. While the management attributes the fall in margins seen in Q3FY16 to revenue threshold not yet met for some on-going projects, concerns on slow order movement and execution delays remain. As the management warns for margins to remain under pressure, L&T's stock may see some more downside (it is already down 37 per cent in last six months versus 11 per cent decline in Sensex), given that it has historically operated at 14 to 16 per cent margins.

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