L&T ORDERS BOOM – REFLECTION OF THE SECTOR?

It is said that the financial performance of Caterpillar was a reflection of the capital goods sector in USA and here in India, it  remains Larsen & Toubro (L&T). Well, the performance was not exactly trailblazing in Q2FY21 but Q3 order intake seems to be relentless.

Take a look at the order intakes at L&T in the last 45-30 days; its been phenomenal!

• On 28th Oct – the construction arm secured a Mega order from the National High-Speed Rail Corporation Limited (NHSRCL) – the biggest EPC contract awarded in India till date and is the first of its kind project with a mandate to construct the 237.1 km stretch MAHSR - C4 package which is part of the Mumbai Ahmedabad HighSpeed Rail Project.
• 11th Nov – The Heavy Business Infra unit got the order for Regional Rapid Transit System (RRTS) Infrastructure from the National Capital Region Transport Corporation (NCRTC) in Uttar Pradesh to execute a new, dedicated, high speed, high capacity rail project in the Delhi - Gaziabad - Meerut Corridor.
• 11th Nov – Power & distribution unit got two international orders – one from Nepal and another from Saudi Arabia.
• 18th Nov – Construction and mining equipment unit secured one of its biggest orders ever to supply 46 units of Komatsu Mining Equipment from Tata Steel.
• 19th Nov –Mega contract from the NHSRCL to construct 87.569 km of the Mumbai-Ahmedabad High Speed Rail (MAHSR) project, popularly referred as the Bullet Train project.
• 25th Nov - a Large contract to construct India's longest road bridge – 19 kms, across river Brahmaputra connecting Dhubri in Assam to Phulbari in Meghalaya.

And the stock price too has reacted positively. On 1st Sept the stock was quoted at Rs.955 and on 18th Nov, it went up to Rs.1147.75. And from its low of Rs.661 in March, it is today up almost 70%.

In H1FY21, there was a 41% drop in order intake and order book was down 1%. That’s understandable given the impact of the lockdown and then the gradual opening up, leaving the supply chains maimed for a long time. Now, call it repressed demand or renewed spirit to build infra, L&T’s order book is looking very good and mainly from within the country. Even in H1FY21, 63% of the orders were domestic.

It looks like H2FY21 will more than make up for the lag in HI for L&T, with order inflow as well as execution to remain very strong. With the Govt putting more stress on infra build, with a significantly large investment plan and funding in place, more order inflow is expected; though orders from the private sector might remain a challenge. The strong monetary and fiscal stimulus will help L&T and the capital goods sector bounce back with more vigor.

For the capital goods sector as a whole, all progress depends entirely on domestic growth and that seems to have been kickstarted. Yes, there is no denying the fact that order intake has gone up sequentially. Does that mean that one should buy into this sector now? For a long term investor, any dip in a stock like L&T is a buy signal. Accumulate at every fall, keeping a horizon of at least 3 to 5 years. Once the economy bounces back, this is one sector which will zoom up first like a rocket.