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Strong Order Book 2

The revenue visibility of Larsen & Toubro's core engineering and construction business has increased due to a rising order book and improving labor availability. L&T has also demonstrated better margin control despite rising input costs. The company's order backlog increased 11% year-over-year and execution rates rose 27% sequentially in the second quarter, and analysts expect 18-20% revenue growth in the next two fiscal years.

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12 views2 pages

Strong Order Book 2

The revenue visibility of Larsen & Toubro's core engineering and construction business has increased due to a rising order book and improving labor availability. L&T has also demonstrated better margin control despite rising input costs. The company's order backlog increased 11% year-over-year and execution rates rose 27% sequentially in the second quarter, and analysts expect 18-20% revenue growth in the next two fiscal years.

Uploaded by

ss8942250
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Strong order book, improving execution bodes well for L&T

The revenue visibility of Larsen & Toubro’ core engineering and construction
(E&C) business has increased amid rising order book and improving labour
availability. In addition, the country’s largest engineering company has
demonstrated better margin control notwithstanding the rising input costs. As
a result, the stock has outperformed the benchmark Nifty 50 by nearly 5% over
the past month. It gained nearly 6% in the five trading sessions after its second
quarter result last Wednesday even as the benchmark indices shed over 2%.

The company’s order backlog increased by 11% year-on-year to Rs 3.3 lakh


crore at the end of September 2021, the highest growth in two years. The
backlog is equivalent to 3.2 times FY21 revenue. The number of workers at its
sites rose to 2,51,000 in October 2021compared with 1,70,000 in May 2021. As
a result, the execution rate of the E&C segment rose by 27% sequentially in the
second quarter of FY22. Analysts expect the E&C revenue to grow by 18% and
20% for the current and the next fiscal years respectively.

Sensitivity: LNT Construction Internal Use


To counter the effect of higher commodity costs, L&T has been focusing on
swift execution to bring more projects to a profitable level and on design
changes to rationalise steel usage in the infrastructure segment. Also, nearly
two-third of the projects have price fluctuation clauses, which provides a
cushion against raw material inflation. As a result, margin of the infra segment,
which accounts for nearly a quarter of the total operating profit, expanded by
180 basis points year-on-year to 8.2% in the September quarter.

The amount of prospective orders for the second half of FY22 rose by 12%
year-on-year to Rs 6.8 lakh crore; over one-third of this is from the overseas
market and includes a large hydrocarbon project bagged during the September
quarter.

With a spate of positive factors such as strong tendering activity, large order
pipeline and operating leverage for margin upside, the valuation of the core
E&C business is expected to improve. It accounts for nearly half of the sum of
the parts valuation of L&T while the balance is contributed by the listed
subsidiaries and infrastructure development projects. The core business
continues to trade at 16.5 times one-year forward earnings, which is at par
with the long-term average.

Sensitivity: LNT Construction Internal Use

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