The stock of conglomerate Larsen & Toubro presents a good route to buy into the infrastructure and engineering space. By dint of sheer size and proficiency across segments from buildings and factories to roads, power equipment and defence, L&T has been able to manage far better than peers. L&T is comfortably positioned on the funding side unlike most peers, with standalone debt-equity ratio at 0.3 times.

At Rs 975, the stock trades at 19 times trailing earnings, at a deserved premium to most other infrastructure players, but well within the PE band in the past five years. The stock trades at 13.9 times estimated earnings for FY15. Investors with a two-to-three-year perspective can accumulate the stock on dips linked to broad markets. L&T will announce its June results on Monday.

Good inflows

L&T’s new orders for the 2012-13 fiscal grew a strong 25 per cent over the inflows for the previous fiscal, in part due to a lower base in FY12. Even so, growth is significant in light of the adverse conditions in infrastructure and capital goods and the sluggish inflows for other infrastructure majors.

Over the past five years, order inflow has grown at a healthy eight per cent annually. The company has already clocked more than Rs 20,000 crore in new orders so far this fiscal. The order book at end-March 2013 stood at Rs 1.53 lakh crore, covering net sales by 2.5 times, lending earnings visibility.

L&T made the most of its wide capabilities and bagged orders in promising segments such as urban infrastructure, water, civil engineering, hydrocarbons and power T&D in the past year. What also helped was L&T’s effort to build its overseas portfolio. Over the past four years, orders from West Asia moved from four to 11 per cent of inflows. It also ramped up exports to 20 per cent of sales by 2012-13 from the 10-12 per cent earlier. Overseas operations do however add the risk of currency volatility.

Strong financials

L&T added significantly to manpower over the past two years, lifting manpower costs. More sub-contracting of construction also pushed up costs – construction and material costs to sales stood at 71 per cent in FY13 against 68 per cent two years ago. Operating margins dropped to 10.5 per cent from 12.8 per cent in the same period. Margins are unlikely to improve in the near term with higher input costs and continued sub-contracting. Standalone net sales have grown at an annual rate of 19 per cent over the past five years to Rs 60,873 crore. Net profits grew 18 per cent in this period to Rs 4,729 crore.

(This article was published on July 20, 2013)
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