L&T’s strong order book as of Q3FY21 boosts investor confidence

In its recent December quarter results, Larsen and Toubro reported a 2 per cent (y-o-y) drop in topline numbers at Rs 35,600 crore. Revenues were down by 28 per cent and 12 per cent in the first and second quarter of FY21, respectively. Despite the company having reported a drop in revenues in the last few quarters (execution hampered due to the pandemic), investor confidence remains buoyant, following the strong order backlog of the company. The stock recently touched a one-year high of Rs 1,395.75 on January 25. L&T declared its third quarter results after market hours on Monday, January 25.

In the December 2020 quarter, the company saw order inflows worth Rs 73,200 crore, up 76 per cent when compared to the order inflows in the corresponding quarter last year. With this, the company has an outstanding orderbook of Rs 3.3 lakh crore, which provides healthy revenue visibility for the next couple of years.

Recent order flows

Of the third quarter order inflows, about 14 per cent came in from West Asia (3 per cent), the US & Europe (8 per cent) and other countries (3 per cent). The international order inflows largely came in from the infrastructure, hydrocarbons, heavy engineering, power transmission & distribution and metallurgical and material handling businesses (its biggest ever order for supply of 46 units of Komatsu Mining Equipment).

On the domestic front too, the company received notable orders in the Transport Infrastructure business vertical. As was evident in October 2020 (management con call post Q2 earnings), the company bagged the order for construction of a stretch (87.6 km) of the Mumbai-Ahmedabad High Speed Rail project (a.k.a the Bullet Train project).

Besides, the contract to construct India's longest road bridge across the river Brahmaputra connecting Dhubri in Assam to Phulbari in Meghalaya (19 km), was also awarded to L&T. Other notable orders won during the quarter include domestic orders for rural water supply schemes in Madhya Pradesh and construction work at the Rajasthan refinery of HPCL.

Way forward

Despite resumption of workforce and supply chain related issues, execution remained slow in the December quarter, owing to social distancing norms. Besides, with weak operations in the Hyderabad metro and rail roko agitation by farmers in Punjab, the company saw a 34 per cent decline in the revenues generated by Developmental Projects segment (contributes less than 2 per cent of consolidated revenues of the company). The segment also saw a drop in operating profit margins to 0.1 per cent from 17.3 per cent in the corresponding quarter last year (owing to lower ridership in Metro services and lower PLF in Rajpura Power station). That apart, the Hyderabad Metro alone resulted in a cash burn of Rs 4,500 crore per quarter, impacting the cashflows of the company.

While it is expected that operations would normalise in the coming quarters, management hasn’t given out any guidance, given the unpredictability of the pandemic.

Orderbook diversification -- Centre (12 per cent), States (34 per cent), PSUs (41 per cent) and private (13 per cent), can aid in managing cashflows and working capital requirements.

After refraining from giving out any guidance in the last three quarters, the management seems to have finally regained its confidence on capex projects. Based on the enquiries received, the management expects a strong pipeline of Rs 2.65 lakh crore in the next 3-4 months -- flowing largely from the Water, Power Transmission and Distribution, Metro, Railways, Roads and Expressway segments (both from the domestic as well as international markets).

Of these, so far in January 2021, the company has bagged orders worth more than Rs 22,000 crore (based on BSE filings). These include orders from HPCL, ONGC, Rail Vikas Nigam and other orders from the Power Transmission & Distribution Business in Bangladesh.

This, coupled with a healthy ramp-up in labour availability (witnessed in December quarter), could help spur execution activity in the coming quarters.