L&T’s Rs 8.5-trillion order book healthy: Analysts

Larsen and Toubro’s (l&T) prospective order book of Rs 8.53 trillion in the current fiscal, though lower by 6% compared to last fiscal, is seen as healthy by analysts. However, inflation may limit margin recovery, they said.

The domestic share of these orders is at Rs 6.31 trillion, while orders of Rs 2.22 trillion are visible in the international markets. Infrastructure segment prospects will form a lion’s share at Rs 5.72 trillion. These orders will be spread across water, with a share of 21%, power T&D at 23%, transportation infrastructure at 19%, buildings and factories at 16%, heavy civil at 17% and metallurgical and material handling at 4%.

L&T’s order inflows for FY22 remained below the guided range of low-to-mid teens, increasing 10% to Rs 1.93 trillion, as award activity slowed down in the domestic market. R Shankar Raman, chief financial officer, L&T, said, “The speed with which the tenders were put out and awards were given in the previous year, when the government and all the agencies were keen to revive the economy from the direct impact of Covid, was missing this year.”

According to analysts at ICICI Securities, “Award finalisation was delayed despite robust tendering activity as sharp increase in commodity prices led to change in projects costs estimates.” However, the current ex-services order book at `3.5 trillion provides growth visibility, they said.

The L&T management has given a guidance of 12-15% growth in revenue for FY23, and expects to recoup some of the 100-basis-point margin decline during the year.

According to analysts, inflationary environment would limit the company’s prospects of covering up for margin disappointment in FY23 and its guidance reflects this. However, L&T’s guidance for revenue growth in low-to-mid teens could be achievable given the strong order backlog, with 98% of the order backlog moving well.

The Indian bellwether has also guided for a 12-15% growth in order inflows.
“The starting point is favourable with government tender conversion ratio to orders being a low 50% in FY22 versus 70% in FY21. This also reflects in a five-year low quantum of domestic share of order backlog at 73%,” said analysts at Kotak Institutional Equities.

The company is also likely to invest Rs 6,000-7,000 crore in new growth areas by FY26. Of this, Rs 1,000 crore will be in electrolysers, Rs 2,000-2,500 crore in battery technology, Rs 2,000 crore in data centres planned with 90 MW capacity, Rs 3,000-5,000 crore in digital platforms like Edutech, and the balance in a green energy tie-up with Indian Oil (IOC).

“Management’s focus is to remain asset light and not take up long-term gestation projects in infrastructure and invest only in manufacturing. Hydrogen investment is limited to tie-up with IOC and should be below Rs 1,000-1,500 crore,” said analysts at Jefferies.