Stock Review: L&T

A healthy order backlog puts L&T in a comfortable position to meet its annual revenue growth guidance of 25%, subject to a smooth execution of projects.

Reporting a healthy profit of about . 750 crore for Q1 FY12, the company's share was down by just about p 0.6% on the bourses even as the Sensex slid by nearly 2% on Monday. However, even as profits continue to remain healthy, pressure on volumes is visible in the backdrop of the policy paralysis and slowing investments in big ticket projects.

The revenue slowdown is more evident in the company's electrical & electronics segment, which, according to the company, is due to muted industrial demand and tight money conditions. However, its machinery and industrial products segment continued a robust growth moment, backed by strong sales growth in industrial machinery and valves.
As at the end of June '11, the company had an order backlog of . 1.36 lakh crore, roughly 4.5% higher than its order book at as the end of FY11. It has added order worth . 16,190 crore during the quarter, which is about 4% higher than its order inflows at the end of June '10. The company continues to maintain its guidance for 15% for order inflows for the year 2011-12.

While the current order backlog does give L&T a revenue visibility for about three years, it is the pace of execution of projects in hand that will eventually determine the recognition of this revenue in its books.

Many of the company's ongoing projects, especially in the power sector, are yet to reach the threshold completion levels and thus go unrecognised in the books during the quarter, thereby putting pressure on margins.

As such, the company has reported a dip of about 95 basis points in its operating margin for the quarter, which reflects the impact of not only projects under execution but also high material costs, staff costs as well as interest expenses. The company expects the margins to continue to be under pressure by about 50-75 basis points for the year. Going forward, while new orders will be instrumental for the company to maintain its order and revenue growth guidance, a smooth execution of its existing orders will be the key.