Indian Army's artillery order worth Rs 4,900 crore may support L&T stock

ET INTELLIGENCE GROUP: The news that Larsen & Toubro, India’s largest infrastructure company, may bag an order worth $750 million (Rs 4,900 crore) to manufacture artillery guns for the Indian Army may cheer investors who hold the company’s stocks.

L&T shares have shed nearly onefourth of their value — roughly Rs 25,000 crore — in the past three months due to a weak order book as the company lost out to competitors in sectors such as road, power T&D, railways, renewable energy and water.

There are a few major benefits for L&T from the artillery gun order. First, it is likely to improve the blended margins for the company. Globally, defence majors enjoy 700 basis points (bps) higher margins than engineering & construction companies, given the stringent pre-qualification norms. The defence order will be under the ambit of heavy engineering segment, where margins are already 400 basis points superior compared to blended margins.

Secondly, analysts have factored in the order of Rs 7,100 crore, Rs 9,400 crore and Rs 11,100 crore from the defense sector in the fiscal years of 2017, 2018 and 2019, respectively.

The first order for artillery guns will boost the conviction of analysts, while this may moderate the earnings per share (EPS) downgrade. The EPS of the company has been downgraded by 14% over the last three months.