Before Larsen & Toubro Ltd’s (L&T) September quarter (Q2FY25) earnings were out on Wednesday, its shares had fallen by 7% over the previous month. Weak government spending in the first half of FY25 due to the general elections and global geopolitical tensions were anticipated to mar L&T’s order inflows last quarter. But the industry bellwether positively surprised the Street with the core—projects & manufacturing order inflows—of ₹63,028 crore, exceeding analysts’ estimate of ₹55,000-57,000 crore. A large part of inflows was from the infrastructure segment, driven by international projects, compensating for muted domestic inflows.
Order inflows fell 14% year-on-year due to a high base as L&T had bagged two ultra-mega orders in Q2FY24. But the Street is drawing comfort from management confidence as L&T has retained its order inflow growth of 10% for FY25. This is despite total prospective order pipeline falling 8% to ₹8.08 trillion for the rest of FY25 due to lower hydrocarbon order pipeline. Still, L&T’s order inflow target may not be tough to meet. According to BNP Paribas Securities India, while order wins needed for H2FY25 at ₹1.8 trillion appear steep versus ₹1.5trillion in H2FY24, it should be noted that L&T is already well-placed with ₹0.3 trillion of thermal power tenders. “Thus, it has to secure order wins similar to H2FY24 levels, which we do not view as particularly challenging,” said the BNP report dated 30 October.
L&T’s total order book stood at ₹5.1 trillion as on September-end, up 13% year-on-year, with 60% being domestic orders and 40% international. Thus, providing robust revenue visibility. Obviously, execution is the key here. With elections out of way, the management expects domestic order inflows to improve in H2FY25. It sees a domestic prospect pipeline of ₹4.13trillion across data centers, hospitals, residential and industrial real estate, rail, expressways, airports, and hydel-related projects. Currently, the domestic order book comprises central government (14%), states (28%), public sector corporations and state-owned enterprises (36%) and the private sector (22%). There are risks, however. “Weakness in domestic investment could impact our current growth assumptions and award of large projects and thus pose a downside risk, especially spending from states given higher sensitivity for L&T,” pointed out Nuvama Research.
Meanwhile, L&T has retained projects & manufacturing revenue growth guidance of 15% for FY25 and operating margin is expected to be at 8.25%. In Q2FY25, core revenue rose 28% year-on-year higher than expectations aided by improved execution in infrastructure projects and core margin stood at 7.6%. L&T’s core operating margin guidance is conservative and could see an upside, said Nomura Global Markets Research. Also, increased order inflow/execution offset cuts in services business earnings and lower non-operating income, Nomura said in a report on 31 October.
The order-win rate in H2FY25 would remain a crucial trigger for the L&T stock, which has gained 6.4% since Q2 results. Still, the stock has languished so far in 2024, gaining just about 3% versus 12% returns in the Nifty 50 index. Additionally, reducing exposure to non-core assets such as the Hyderabad Metro Project, could aid investor sentiments. Average ridership was up slightly year-on-year in Q2FY25. In the earnings call, the management said monetization of the Hyderabad Metro transit-oriented development rights will be done in tranches, with each tranche requiring state government approval. The company expects some monetization to take place in FY25; this should help L&T boost its return on equity (RoE). L&T has maintained the guidance of 18% RoE by FY26.
