A returned L&T to retain interest

The change of priorities for India's largest infrastructure company, Larsen & Toubro (L&T), continues to be seen in its financial performance.

The management has changed its focus to improving the balance sheet over chasing profit growth. L&T has been able to bring down its net working capital -the money used for day-to-day operations - by 321 basis points from a year earlier to 20 per cent in the June 2017 quarter.

A steady fall in working capital will enable the company to improve return on equity (RoE) and also lend more credence to its five-year strategic vision, where improvement in RoE is one of the critical targets.

Typically, improvement in RoE helps analysts to ascribe superior price-earnings (PE) multiple to a stock. The street expects the RoE to reach 14 per cent over the next two fiscal year. At the end of fiscal 2017, the RoE was 12.8 per cent.



The overall order inflow growth of the company has not been very impressive in the June quarter due to a high base -it had received a $1 billion order from Saudi Aramco in the year-earlier period. However, domestic order inflows grew 12 per cent to Rs 18,500 crore.The large part of these was in the transmission and distribution, water and renewable areas.

The overall order inflows, though, declined 11 per cent to Rs 26,400 crore in the quarter when outstanding orders totalled Rs 2.63 lakh crore. On the execution side, the domestic infrastructure segment and hydrocarbon are turning into bright spots for the company.

Revenue from the infrastructure segment rose 14 per cent, mainly lead by a pickup in growth in the domestic side. In the domestic infra segment, reve nue grew 18 per cent due to execution of orders in transportation infrastructure. With lossmaking orders becoming a history, revenue in the hydrocarbon segment rose 19 per cent.

The turnaround in hydrocarbon is more visible in the margins of the segment. The operating profit mar gin in the hydrocarbon segment expanded to 6.8 per cent in June 2017 from 2 per cent a year earlier.

The overall margins of the company remained subdued as it began executing many large, longduration, orders, where it recognises margins only after completing 25 per cent of the work.

The company has maintained its guidance of order inflows, margin and revenue growth for the current fiscal year, given a quarter ago. It has guided for order inflow growth of 12-14 per cent, similar to what the street has been pricing in.

L&T's stock moved in a tight range in the past three months. With the company focusing on improving its growth and RoE, and it being one of the best proxies to play the Indian capex story, the stock is likely to remain on the radar of long-term investors.