Ideas For Profit|Larsen & Toubro: Q2 performance raises expectations

Jitendra Kumar GuptaMoneycontrol Research

Given the current economic environment, most analysts had not expected much of Larsen & Toubro (L&T) for the September quarter. But L&T was more confident of its own fortunes and recently concluded a share buyback.

If there was any question at all, the company’s earnings for Q2FY19 should be answer enough. The stock is up 5 percent since the results announcement.

L&T had guided 12-15 percent revenue growth for the year, in the first half of the current fiscal year, it has already delivered 20 percent. Its order inflows have grown 42 percent to Rs 78,100 crore.

The management is confident that the company will maintain its growth rate in the second half of FY19, as execution continues to be high because of the general elections next year.

All round growth

L&T’s performance in the Q2 is worth noting. It reported strong growth in most of the segments it operates in.

Revenue from the infrastructure segment, which brings in the bulk of the company’s earnings, rose 22 percent on year as projects were implemented faster and execution improved.

The company also performed well in other important segment it operates in – hydrocarbons. Revenue from the segment, which  accounts for close to 12 percent of the overall pie, jumped 38 percent spurt as oil and gas companies spent more as capital expenditure.

The company’s performance in the power segment, which brings in 3.5 percent of its revenue, remained poor because of a lack of projects both in India and abroad.

Moreover, because of higher operating leverage and better pricing power in some of segments in which it witnessed strong traction, the company was able to report a higher operating margin.

During the quarter ended September, L&T saw its EBITDA margin improve by 50 basis points to 11.8 percent, which was reflected in the 20.2 percent increase in its net profit, which rose to Rs 2,023 crore.

Valuations and outlook

L&T is witnessing strong momentum in terms of project awards, largely from the government, in segments like infrastructure and others.

The company believes private sector capex is still low and is something to be monitored, given the ongoing liquidity crisis and the uncertainty before next year’s general elections. Nevertheless, with execution improving in key segments, it is seen ending the current fiscal year with a decent growth rate.

The company is sitting on an order book of close to Rs 2.81 lakh  crore, or about 2.4 times its FY18 sales. Assuming the growth trajectory remains good, at its current valuation of 22 times its FY19 estimated earnings, the stock is reasonably valued.

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