Stock Review: Larsen & Toubro (L&T)

The company is well on course to achieve the targets, but rising costs can act as a hurdle

 

Larsen & Toubro (L&T) has been a market performer during the last six months amid absence of major positive triggers. However, analysts expect an upmove, as the core business may bounce back during the second half of 2010-11 on robust execution of an all-timehigh order book of `1,15,400 crore (about three times 200910 revenues).

The company witnessed apick-up in execution in the September quarter, given the 17.8 per cent year-on-year jump in revenues, as compared to the 6.4 per cent growth in the June quarter. Operating profit margins (OPMs) rose marginally by 80 basis points to 11.7 per cent in the first half of 2010-11.

Robust order inflows in the second half of 2009-10 indicate strong revenue growth in the second half of 2010-11 as it usually takes a year to start execution. However, OPMs are unlikely to improve significantly due to a rise in input costs. The subdued performance of non-engineering and construction segments in the first half also needs to improve.

Nevertheless, the company is well on course to meet its growth guidance of 20 per cent and 25 per cent in revenues and order inflows, respectively, while OPMs are likely to be maintained around the 2009-10 level of 13 per cent.

The company bagged orders worth `36,000 crore in the first half, up 29 per cent year-on-year, and accounted for about 41 per cent of the targeted `87,000 crore for 2010-11. Analysts believe the balance (orders worth `51,000 crore) is achievable as the second half has always been better. An expected pick-up in tendering activity in West Asia may help.

Apart from an optimistic outlook for the core business, analysts have started upgrading the valuation of investments in the company's subsidiaries on the back of robust activity in the development projects subsidiary and potential listing of L&T Finance Holdings.

The recent announcement of dividing the business into nine independent companies and listing a few of them augurs well for focussed expansion and smooth operations.