Order pick up to sustain growth momentum for L&T
Engineering major Larsen & Toubro (L&T) has seen share price volatility in the past few months due to concerns about order inflows. The domestic market has seen a deceleration in orders, partly due to election-related uncertainties and partly because of decline in orders from the domestic oil and gas industry. In addition, there were concerns about key client Saudi Aramco easing up on capex.
L&T received orders worth ~1.8 trillion in 9MFY24, up 65 per cent year-on-year (Y-O-Y). This was driven by overseas orders. Domestic inflows declined by 11 per cent. Infrastructure segment orders were flat due to electionrelated delays. Domestic orders improved in January 2024 for infrastructure but a serious pickup is unlikely before elections conclude.
By March, orders disclosed for Q4FY24 added another ~51,000 crore. L&T started FY24 with 10-12 per cent order growth guidance for FY24, raised it to 20 per cent post Q3FY24 results and it is running at 30 per cent Y-O-Y growth. The order tally for Q4FY24 so far includes ~35,500 crore of domestic orders.
Out of overseas orders of $56 billion, around $15 billion is in Saudi Arabia and 50 per cent of that is from Aramco. Saudi Aramco’s average annual capex over CY18-22 was $33 billion. In January 2024, Saudi Aramco received a directive to cap maximum sustainable capacity (MSC) at 12 million barrels per day (mmbd), and not take it to 13 mmbd as earlier planned. Subsequently, Saudi Aramco dropped its plan to develop the Safaniya oil field which was a prospective order in L&T’S Q4FY24 prospect tally of ~6.27 trillion. However, recent capex guidance from
Aramco indicates CY24 guidance is $48-58 billion implying this will not translate into a reduction in investment momentum. This led to a relief rally for L&T which saw a 6 per cent dip in share price in February this year.
Domestic inflows
The management claims Y-O-Y degrowth in domestic inflows in 9MFY24 was due to a high base, particularly in domestic hydrocarbon and lower-thanexpected margins were due to legacy projects, which are now close to completion. The management is optimistic about the sustainability of overseas orders, particularly in Saudi Arabia. There are low working capital needs in international projects despite these being fixed-price. All the trends could lead to positive factors by H2FY25. A ramp-up in activity post-elections may be expected. The completion of low-margin legacy projects in the next two quarters, will lead to margin improvement.
The balance sheet is strengthening due to constant reduction in working capital. The company is looking at opportunities in transportation infra (state road projects), highspeed rail and metro, irrigation, power transmission, etc. Private sector capex has started improving and further opportunities could arise in thermal power, Pli-led capex, and semiconductor capex.
International inflows
International inflows surged 377 per cent Y-O-Y in 9MFY24, primarily from hydrocarbon and infrastructure segments of the West Asia. L&T has been shortlisted for one package of Aramco’s gas-based projects — MGS-3, as per media reports. Part of the company’s derisking strategy is by mobilising teams and localising resources in Saudi Arabia for timely completion.
Assuming 10-12 per cent annual growth rate in government capex over the long term, and an anticipated recovery in private sector capex, we can expect momentum going ahead. Since both domestic and international markets are in expansion mode and the company has managed to reduce working capital needs, analysts remain positive about the stock. The slowdown in orders, delays in project completion, or a sharp rise in commodity prices, or an increase in receivables could be possible downside risks.