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L&T Faces Risk Of Missing Full-Year Order Guidance Amid Virus Turmoil

L&T maintains guidance for order inflow at 10-12% and revenue at 12-15% for the financial year ending March 2020.

A trainee learns carpentry at L & T Construction Skills Training Institute in Panvel, India. (Photographer: Adeel Halim/Bloomberg)
A trainee learns carpentry at L & T Construction Skills Training Institute in Panvel, India. (Photographer: Adeel Halim/Bloomberg)

India’s largest construction and engineering company faces the risk of missing its full-year order inflow target as crude oil prices plunged and the coronavirus pandemic stalled economic activity.

After the third quarter, Larsen & Toubro Ltd. — considered a barometer for private investments—maintained guidance for order inflow at 10-12 percent and revenue at 12-15 percent for the financial year ending March 2020. While the conglomerate doesn’t disclose the exact value of orders due to confidentially issues, it classifies them into four buckets—‘significant’ (orders worth Rs 1,000-2,500 crore), ‘large’ (Rs 2,500-5,000 crore), ‘major’ (Rs 5,000-7,000 crore) and ‘mega’ (above Rs 7,000 crore).

The company requires orders worth Rs 66,000-70,000 crore in the fourth quarter to meet the order inflow guidance. Of which, it has only bagged a third, or Rs 27,500 crore, according to data available on exchanges. To be sure, this doesn’t include orders less than Rs 1,000 crore and sensitive orders that are not disclosed. L&T had received a better-than-expected order inflow worth Rs 41,579 crore in the quarter ended December.

Now the Covid-19 pandemic, which has forced the government to effect a 21-day lockdown in India, poses a challenge to L&T’s guidance. Indian equity markets, too, have seen a downward spiral, tracking their global peers, hitting the lower circuit twice in a month. L&T shares lost half their value from the February peak. A pricing war in the crude oil market has only made matters worse for the construction company that does considerable business in the Middle East.

JPMorgan expects a potential deferment of contract awards due to the coronavirus outbreak. Late acceleration in order inflows looks tough for L&T even in its busy month of March, the brokerage said.

According to Dhirendra Tiwari, head of research at Antique Stock Broking, the sharp fall in oil prices can potentially impact Middle East capex, which currently forms 15 percent of L&T’s order book and 13 percent of revenue. As oil continues to be a key revenue contributor to the Gulf Cooperation Council’s budget, weakness in prices for a long period can impact execution of existing large-ticket orders that L&T has won over the last two years, Tiwari said in a report.

Brent crude price has tumbled 50 percent so far in March amid a standoff between Saudi Arabia and Russia over production limits. L&T’s hydrocarbons division depends heavily on Middle East—which, according to Macquaire, accounts for more than 50 percent of orders for the segment. The company hasn’t announce any order inflow in the hydrocarbons vertical—which contributed 12 percent to its revenue in the three months ended December—after crude prices weakened in the ongoing quarter.

Since FY14, L&T has received periodic spurts of hydrocarbon orders from the region, which may not be sustained if oil prices remain at low levels, hampering cash flow of key clients such as Saudi Aramco, the brokerage said.

Credit Suisse said international inflows had been one of the growth drivers for L&T in the first nine months of the ongoing financial year but were likely to become weaker as countries reassess priorities. Its domestic business is already weak on account of lack of government spends, Lokesh Garg, analyst at the research firm, wrote in a report.

Previously, too, lower crude oil prices had hurt L&T’s profit margin as orders in the hydrocarbon segment fell, accompanied by delay in client-led execution and project cost overruns. Historical analysis suggests that L&T’s engineering and construction segment’s overseas orders, primarily dependent on Middle East, fell 28 percent in FY15 when oil price corrected, according to Antique Stock Broking.

According to Ajinkya Bhat, analyst at Macquarie, L&T is diversified with a strong order book but the coronavirus outbreak and low oil prices added to its woes amid slowing economic growth, liquidity concerns and high fiscal deficits. The announced order inflow so far for the fourth quarter remains weak and poses a risk to the company’s FY20 guidance, Bhat said in the report.

L&T is yet to respond to BloombergQuint’s emailed queries.

Nomura, however, said the concerns that oil price drop would lead to a decline in Middle East order inflows were overdone. The recent fall in oil prices has led to an overall decline in planned capex in Middle East but L&T has grown and gained market share in the region, especially in hydrocarbons, Priyankar Biswas, vice president at the brokerage, wrote in a March 16 report. This, he said, has been aided by a long-term agreement with Saudi Aramco as a preferred supplier and exit of Korean players. Nomura expects a steady order inflow in the hydrocarbons segment.

This won’t be the first time L&T may fail to meet its order inflow guidance. The company has managed to meet the forecast only once in the past six years—in 2018-19—without scaling down the target. In the other five years, the management cut guidance midway through the fiscals.