The impact of GST, RERA and demonetisation seems to be finally easing, with industry heavyweight L&T reporting a strong 37 percent growth in order inflow to Rs 36,100 crore.
Moreover, the government’s focus on speeding up the awarding of key projects before the election is leading to strong growth. The company maintains 10-12 percent order inflow guidance for the current year, most of which are expected to come in the first half or by the third quarter of current fiscal.
L&T is sitting on an order book of close to Rs 2,71,700 crore, which provides strong visibility in terms of the revenue growth and profits over the next two years.
It aims to improve its margins and return ratios and gradually divest from non-core businesses to deliver better returns for the shareholders. Thus, the growth trajectory remains fairly stable.
Robust operating performance
During the quarter ended June 2018, L&T posted 19% growth in revenues largely driven by growth in domestic revenues, which accounted for 65.8 percent of total revenue.
Its key infrastructure segment, accounting for 43 percent of revenue, delivered 9.7 percent year-on-year growth as a result of improvement in execution. Barring the power segment, merely 3.8 percent of the business, which showed a 39 percent decline, other segments such as heavy engineering delivered 29 percent growth, followed by a 37.4 percent growth in defence and a robust 38.5 percent growth in the hydrocarbon segment.
Hydrocarbon, which accounts for 12.4 percent of the total revenue saw strong revival as a result of higher oil prices and growth in capex. Interestingly, as a result of higher utilisations and cost optimisation among the different businesses, the company was able to record 142 basis points improvement in the EBITDA margins.
Most of the segments saw improvement in margins as a result of higher sales. Thus, during the June quarter, its EBITDA jumped by 40% on a year on year basis and resulted in net profit growth of 40 percent to Rs 1,200 crore.
Valuations: reasonably priced
L&T is expecting order inflows to remain strong in the run-up to the general elections in 2019. And with the execution improving and other businesses such as technology and finance making higher contribution, it should deliver double-digit growth in sales and earnings. In the current fiscal the company should report an EPS of about Rs 58 a share. At current market price of Rs 1324, price to earnings ratio works out to about 23 times, which is reasonable.