Weak execution but strong order inflows. That, in a nutshell, was Larsen and Toubro's performance in the third quarter of FY20. The infrastructure major cited execution challenges in Andhra Pradesh, Delhi-NCR and Mumbai as major reasons for the weakness, but maintained FY20 guidance on order inflows, revenue growth and margin expansion.

L&T’s Q3 topline missed street expectation with 6 percent year-over-year growth, compared to CNBC-TV18 poll's estimate of 10 percent. The weakness was attributed to the infrastructure segment, where revenue declined by 5 percent Y-o-Y.

The management said that a revenue loss worth of Rs 2,500-Rs 3,000 crore incurred in Q3 due to execution roadblocks in Andhra Pradesh, a construction ban in Delhi-NCR and regulatory hurdles related to the Mumbai Coastal Road Project.

The management is however confident that slow-moving orders have started picking up in Q4 as construction resumed on the Mumbai Coastal Road Project and partial revocation of the construction ban in Delhi-NCR.

Consequently, the management has maintained its 12-15 percent revenue growth in FY20. This implies revenue of Rs 50,000-54,000 crore in Q4 to meet the lower end of guidance, compared to Rs 45,000 in Q4FY19.

Analysts believe while the ask rate is not unrealistic, it does leave room for a miss on FY20 guidance.

The silver lining in the results was 11 percent Y-o-Y growth in order inflows at Rs 41,580 crore. This came as a surprise as the Street was expecting order inflows worth Rs 25,000-30000 crore.

The management said that while large domestic orders continue to see deferment, the order inflow has been driven by international orders. The management is confident of securing orders worth Rs 60,000 crore in Q4 and hence, maintain 10-12 percent order inflow guidance for FY20.

While infrastructure revenue declined, Q3 revenue was driven by Hydrocarbon and IT&TS businesses. Consolidated margins also improved to 11.4 percent on the back of improvement in heavy engineering, defence and hydrocarbon segments.

The company's focus on cash flow and working capital was also evident as working capital as a percentage of sales was contained at 23.5 percent . This is a sequential deterioration of 50 bps but given the macro challenges, analyst expect working capital stress to be temporary.

The brokerages continue to be sanguine on L&T with an average target price of Rs 1,670, suggesting upside of 25 percent. Morgan Stanley expects stronger Q4 numbers despite lower-than-expected Q3 earnings.

CLSA reiterated a "Buy" call as the brokerage sees L&T as a good proxy for domestic capex and believes that the company has a credible strategy to improve growth and ROE. CLSA reasoned that the stock is inexpensive at -1sd at the cusp of next domestic capex cycle upturn.

Credit Suisse maintained a "Neutral" call on account of headwinds from hostile broad macro (gap in government finances, slow credit growth and a slowdown in economic activity) as well as company-specific positioning in terms of inflows, margins leading to misses and consequent de-rating.

The stock price rose on Thursday despite weak earnings as valuations are compelling at 15 times FY21E PE vs the historic average of 19-20 times. UBS said the stock is trading at its largest discount to the Nifty (15 percent discount compared with 25 percent 10-year average premium).

Experts believe that strong ordering, margin improvement and expectation of special dividends from E&A sale proceeds are likely to drive the stock's performance in 2020.

First Published:Jan 23, 2020 12:27 PM IST