L&T trims its order book; raises concern about its peers

MUMBAI: India’s biggest engineering firm Larsen & Toubro (L&T)’s decision to trim its order book by potentially 10% has heightened concerns that other capital goods and engineering companies may also be carrying orders that may not take off and would have to be eventually struck down.

Shares of L&T declined over 3% in early trade on Thursday to a day’s low of Rs 1,255 on the BSE, reacting to a news report in ET that the company may remove orders worth Rs 10,000 crore-Rs 15,000 crore from its order book, as lack of approvals, aggressive bidding and other problems have frozen project execution by some customers, mainly in the roads, minerals and metals sectors.

Taking a cue from the sector leader, other capital goods shares declined 1-3% even as the benchmark Sensex ended down 0.2% at 22,509.07. “Some capital goods and engineering companies have written off orders, which were smaller than L&T, so they were not as visible. Even BHEL has indicated 10% of its current order book is moving very slow, so there are unhealthy orders in the system.

But we expect things to pick up post elections,” said Chirag Muchhala, analyst, Nirmal Bang Institutional Equities Research. Shares of state-run Bharat Heavy Electricals Ltd (BHEL) fell 3.2% on Thursday to close atRs 187.60 on worries over unhealthy orders and weak order pipeline. Most infrastructure companies ET contacted refused to comment on whether they too have weak orders that have to be written off.

But industry experts said L&T’s step is a prudent one, which it does because its robust order book provides it the comfort of revenue visibility for almost two years. Several infrastructure projects have been stranded and have turned unviable due to long delays in securing clearances, regulatory hurdles, policy uncertainty, and in some instances, very aggressive bidding.

These factors have impacted projects across sectors such as power, coal, highways, mining and metals. Project developers have put their ventures on hold either due to their own weak financial health or due to disputes with government agencies. This has hurt the order book and revenue of capital goods and engineering companies which thrive on business from such infrastructure developers.

“The aggregate performance of capital goods companies under our coverage is not likely to be materially different than the past quarters. The margins remain under pressure with profit after tax on the decline. The aggregate earnings growth is expected to be dented by a weaker performance from larger players like BHEL and Thermax,” said brokerage Sharekhan in a note on Wednesday.

Companies, as well as experts tracking these companies, believe infrastructure may see a revival after the elections, irrespective of which party comes to power. But they believe the revival would be led by orders placed by government agencies and it may take six months to a year for the private sector to resume investment.