Macroeconomic headwinds, longer execution cycle and poor margins are big hurdles that L&T needs to clear their huge order book backlog, which is a daunting task, according to the brokerage

Larsen & Toubro is going through a difficult phase, with margins and execution both weakening amidst difficult economic times and increased competition, according to Nomura Equity Research. The brokerage downgraded L&T’s target price to Rs921 from Rs997 while maintaining a ‘neutral’ stance.
 

 “We believe that L&T is among India's best players on infrastructure and the corporate capex cycle. However, an unfavourable macro environment and impediments to new orders driven by policy paralysis across sectors plague the medium-term growth and margin outlooks for the company. We are 5-6% lower than consensus on FY14/FY15 PAT estimates,” Nomura said in a research report.
 

The infrastructure sector has been riddled with execution problems for the last few years, particularly the power segment where orders have stalled and state electricity boards restructured. Hydrocarbons and heavy engineering were the key margin drags, while power dragged down revenue growth. Nomura believes that execution will be difficult and could drag revenues.
 

Nomura, “On our estimates (for L&T) to achieve revenue growth of 15%y-y (with revenue break up 80:20 –exports: imports), the execution rate on the domestic order book has to be close to 43%. We believe it will be difficult to achieve such high execution rate given 27% of L&T’s order book is from the B&F segment (primarily domestic) where execution cycle is higher.”
 

Even though order inflows for L&T have been strong this quarter. The order inflow during first quarter of the 2014 fiscal was pegged at Rs25,200 crore, while the total order book as of March 2013 was Rs1.65 lakh crore. Order book growth rate was pegged at 20% year-on-year, which is optimistic. Despite macroeconomic headwinds, Nomura expect L&T’s revenue growth will be driven by higher execution of domestic order book.
 

 Two key factors that affect L&T are longer execution times and poor margins. The company is less inclined to press ahead with projects if margins deteriorate. “A depleting book to bill ratio in exports and faltering revenue growth in domestic markets are a key concern area,” says Nomura .
 

According to Nomura, the company has retained its full-year guidance for order inflow and margins, but was cautious about the future citing difficult macro economic environment.
 

L&T shares closed 4% down at Rs867 on the BSE, while the 30-share Sensex too ended 1% down at 20,090.