L&T Stock Price: Higher order intake, improving margin may help L&T stock to reduce market under performance

A significant June quarter growth in Larsen and Toubro’s core order inflow, which excludes services and development businesses, exceeded market expectations. Core order inflow for the country’s largest infrastructure company increased by 8% to Rs 54,400 crore, driven primarily by the energy and hi-tech manufacturing segments. The growth is expected to help in achieving FY25 order inflow guidance of 10%, despite a decline in overall order prospects by 10% to Rs 9.1 lakh crore. The stock gained over 2% on Thursday in a weak market.

The compression in order prospects was due to a 38% drop in the hydrocarbon projects. At the end of June, order prospects comprised Rs 6 lakh crore of infrastructure projects, Rs 2.2 lakh crore of hydrocarbon projects, Rs 0.4 lakh crore of power projects, and the rest in hi-tech manufacturing.

Including IT, financial services, and development projects, L&T’s total order inflow was Rs 70,900 crore in the first quarter of the current fiscal year, bringing the total outstanding order book to Rs 4.9 lakh crore. The growth was primarily led by overseas orders, which increased their share in the total orders to 46% from 42% a year earlier.

To meet the full year guidance, L&T needs to secure Rs 2.1 lakh crore in core orders, implying an order win-prospect ratio of 22%. The ratio is lower than 24.6% seen in the previous year, which suggests that the FY25 target is within reach. The company has guided for 22-23% of orders in the prospect list. It needs to maintain a quarterly run-rate of around Rs 68,000 crore for the remaining fiscal year. Core order inflow for L&T was Rs 2.4 lakh crore for FY24.

The company will maintain its overseas focus mostly on hydrocarbon projects, solar EPC, transmission and distribution, and metro projects. Notably, new city development contracts in Saudi Arabia are not part of the company’s prospects due to their uncertain nature. Analysts have projected core order inflow of Rs 2.6 lakh crore and Rs 2.9 lakh crore for FY25 and FY26 respectively, implying year-on-year growth of 8% and 10%.After missing margin guidance for three consecutive years, the company aims to keep the profitability steady. In the June quarter, the core operating margin before depreciation and amortisation (EBITDA margin) improved by 16 basis points to 7.5% led by the infrastructure division which reported 70 basis points improvement.The stock has underperformed the benchmark indices by 12% in the past three months. The stock trades at 33 times one-year forward earnings compared with the long-term average valuation of 26 times.