L&T better placed compared to its peers: SBI Cap

Larsen & Toubro, engineering and construction company announced its third quarter of financial year 2012-13 results today. It disappointed the street by its earnings, but the order inflow came in higher than expectations. In an interview to CNBC-TV18, Nirav Vasa of SBI Cap said that L&T is better placed compared to its peers right now. The cost of debt for L&T is the lowest in the entire industry and this is a positive thing for the company.

Below is the edited transcript of his interview to CNBC-TV18

Q: Larsen & Toubro (L&T) numbers are a mixed bag. Looks like on the top-line and on the margin front a slight miss but on the order inflow front, it is slightly better, how would you read into the numbers?

A: Effectively, the information which was shared by the company through a press release was close to a number of Rs 11,048 crore. Almost Rs 9,000 crore worth of orders were not disclosed by the company.

Overall, the other number that I would like to look out for is that almost Rs 2,000 crore worth of orders from GVK. This, in my opinion is not an order that would be in the execution phase. GVK is not in a position to take the order forward.

So, effectively, the net order inflow, which was shared by the company through press release, is just around Rs 9,000 crore. Whereas the final order inflow is almost to Rs 20,000 crore.

Also read: L&T Q3 net up 13% to Rs 1120cr, shrs up 2% on order inflow

Q: They must have not chosen to cut out GMR and GVK’s orders that were around Rs 5,000 crore?

A: Exactly. Now if you look at the order inflow numbers for the first nine months, it is almost Rs 60,000 crore.

Q: You do not know whether Rs 20,000 crore is net of these cancellations?

A: Exactly. The other important thing is GVK is up almost Rs 2,000 crore, whereas, the GMR number, its order is of Rs 2,809 crore. So, effectively almost Rs 5,000 crore worth of orders which might be there, the order inflow might not be an execution able order.

So, the quality order backlog also has to be seen right now. As from my understanding, the majority of the order finalisations happening are in the civil construction space. There the margins are lower and working capital requirements are much higher compared to equipment business.

Q: Any expectations you have on the segmental margins?

A: In terms of profit after tax (PAT) margins are almost in line. However, I would not like to comment right now on the segmental margins. This is not the way I would like to have a look at the numbers.
 
I would prefer to do a year-on-year (YoY) basis comparison for the segments. At this phase, I believe L&T is better placed compared to its peers right now. Due to its diversified presence and more importantly the cost of debt for L&T is the lowest in the entire industry. This is a very major positive thing for the company.

Q: The Company had guided for about 70 bps decline in FY13. Do you think it should be read as an inline number on E&C? If that helps then will the nine month margin be 11.1 percent?

A: In project business, I would not like to take a call on quarter on quarter basis. Decline in margins is already there. That is something that management had already communicated, considering the quality of order inflow which they are anticipating.

So, this lowering of margin is in line, but how lower can they go is more important. If you see in civil construction majority of orders don’t have any kind of escalation until and unless they are from government companies. If more orders are from the private space and there is a major delay then in case of commodity spike the margins could be further dipping down.

Q: In terms of outlook the company has said that with strong order book it expects to sustain growth in the period ahead. Is that giving you any confidence?

A: For FY13 the company should be able to meet the targets that they have given. More importantly, when this civil construction order come at ground level execution in FY14-15 that should be watched more closely. When the low quality order inflow comes in execution phase that could be the time when the maximum crunch would be felt.