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Brokerage firms on Wednesday appeared divided in their calls on Larsen & Toubro (L&T) after the company’s 2023-24 (FY24) October-December quarter (third quarter, or Q3) performance and guidance for the quarters ahead.
While few stayed optimistic about the stock over future order inflow prospects, others saw increasing exposure to West Asia and fixed price contracts as a concern.
In Wednesday’s trade, L&T’s share price closed at Rs 3,480 per piece, 4.22 per cent down from its previous day’s close.
The company announced its Q3FY24 financial performance after market hours on Tuesday, a 15 per cent year-on-year (Y-o-Y) rise in net profit at Rs 2,947 crore on the back of better operational performance and more orders.
Revenue was up 18.84 per cent Y-o-Y to Rs 55,128 crore.
The company reported lower-than-expected margins for the October-December quarter despite beating revenue estimates.
L&T’s management indicated the pace of new orders in the domestic market had slowed, and there would be weakness for the two quarters between now and June 2024 owing to the Lok Sabha elections.
The stock had hit a record high of Rs 3,738.9 in Tuesday’s (previous day) intraday trade.
In the past 10 months, it has zoomed 64 per cent.
The management’s guidance has left brokerage firms divided in their opinion on the company’s prospects here on out.
Kotak Securities, for instance, has downgraded L&T to ‘sell’ (from ‘reduce’) on an expensive 33 times one-year forward core earnings per share multiple.
It finds it difficult to be liberal on multiples, given the growing share of fixed-price contracts (42 per cent versus 33 per cent earlier) and related increase in margin volatility.
The domestic brokerage flagged the high 30 per cent share of Saudi Aramco in backlog and its reassessment of growth plans, weakening domestic orders before the start of the proposed path of fiscal consolidation and margin bottoming out at much lower levels than expected as other concerns.
This view is in stark contrast to that of analysts at Bank of Baroda and Centrum, which maintained a ‘buy’ and an ‘add’ recommendation on the company.
Analysts with Bank of Baroda said they maintain a ‘buy’ owing to the enhanced order outlook and growing order book.
L&T management on Tuesday said it expects to end the current financial year with an order backlog of Rs 5 trillion and a 20 per cent plus growth in order inflow for the full year.
The company’s top finance executive also indicated the pipeline for potential orders in the short term was around Rs 6 trillion.
Others like Centrum continue to count L&T’s exposure to West Asia as a positive.
“We have maintained our estimates and ‘add’ rating on the stock and believe that execution is expected to remain strong with favourable tailwinds from domestic government capital expenditure and strong outlook on the West Asian economy,” analysts with the brokerage wrote in a note.
Brokerages such as Nuvama differed in their view on West Asia as they downgraded the stock to a ‘hold’, stating: “Time for a breather; core operating margins sluggish.”
In its note on L&T, Nuvama said, “With the stock up 36/72 per cent over the last six to 12 months, we find limited upside.
"We fear the streak of mega order wins in West Asia may flatten in a few months while India order inflow growth is subdued.”
The brokerage also sees the risk of commodity cost hits as 40 per cent of L&T’s contracts are now fixed price.
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