Selling High

Over the last three months, keeping in step with the broader market, the stock price of Larsen and Toubro has climbed 16%. The stock has been weighed down as lack of short-cycle orders and capital allocation to infra-assets have dented margins. L&T’s consolidated margins slipped 184 basis points YoY to 10.3% in Q3FY16. However, the company has recently seen an uptick in order flows. In Q3FY16, the company saw a rise of 10% YoY in engineering and construction (E&C) order inflows, in stark contrast to analysts’ expectations of a decline.

Amid this uptick, group executive chairman AM Naik has recently sold shares worth ₹3 crore, bringing his stake down to 0.26%. Meanwhile, analysts remain concerned about the quality of L&T’s orderbook. The growth in orders has largely been in transport, transmission and water businesses, which indicate increasing dependence on long-dated projects. L&T’s infrastructure segment’s book-to-bill ratio has risen further to 4.2x.

Domestic business remains a worry with standalone revenues declining by 1% YoY. The decline was offset by the strong growth seen in the power segment (up 96% YoY). If power is excluded, revenues were down 9% YoY. Even within the power segment, international business has accounted for bulk of the growth. International power revenue was up 10% YoY on a consolidated basis whilst domestic was up 25%.