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L&T: Slowdown or no slowdown? - Views on News from Equitymaster

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L&T: Slowdown or no slowdown?

Feb 22, 2010

For L&T, Indiaís largest engineering company, business has been a little sluggish off late. Sales, for the first nine months of this fiscal (FY10) have been flat. Infact, its sales during the December 2009 quarter saw a fall of 6% YoY. The engineering and construction (E&C) segment, which contributes about 85% of total sales, has been the chief contributor to this dismal performance. However, this kind of a performance is pretty much unlike its past for this aggressive behemoth. The company has seen an average sales growth of 30% for the last 5 years. It is only fair then that we get into little more details to dig out how exactly the company is positioned with respect to its past.

Source: Equitymaster Research

The chart above shows L&Tís order backlog to sales ratio for the past 10 quarters. It stacks up the companyís order backlog for its E&C division (orders on hand but yet to be executed) at the end of every quarter to the segmentís sales during that quarter.

The chart makes one thing clear. Its order backlog to sales ratio at the end of the December stood quite high in comparison to its past. What this means is that despite the fact that the companyís performance with respect to sales has taken a back seat, its order backlog has clearly not met with the same fate. In fact, while sales have gone nowhere during the past nine months of FY10, order backlog has seen a year on year growth of almost 33%. It has gone from Rs 670 bn in 3QFY09 to Rs 894 bn 3QFY10.

This only reinforces the fact that, as such, the companyís business and its inflows of new orders has clearly not slowed down. It is just that the execution of the orders that the company already had at the start of FY10 has been painfully slow. We have discussed the reasons for this slow execution in our analysis of the companyís 3QFY10 results and will not repeat them here again. But whatís important to note here is that this is not a slowdown in the companyís business as such, but only a hiccup on the topline front due to the delays in execution. As expressed by the management, many of these issues have now been overcome, and we expect sales to pick up once again from here on.

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