ET Intelligence Group : To be or not be in the stock: For investors in Larsen Toubro, this is a complex question to answer before India votes to elect its next government.Typically, investors believe that orders for infrastructure, construction and engineering companies moderate ahead of general elections.
But this perception appears to be a misnomer for LT, based on the historical trend of order inflows in the quarters ahead of previous general elections.
Order inflows ahead of the past three general elections in 2004, 2009 and 2014 show that activity picked up from the March quarter before the general election in the range of 31-65 per cent and continued until the December quarter.
Local engineering and construction (EC) orders in the March quarter before the general election in 2004, 2009 and 2014 rose 187 per cent, 65 per cent and 19.8 per cent, respectively.This time, too, the proportion of government orders in the total kitty has risen considerably in the past few quarters.Any moderation in order inflows is a key concern for investors of infrastructure companies because the Street assigns price-earnings multiples based on the number of years of revenue visibility.In a recent note, Nomura said there is a clear correlation between order activity pick-up for LT in the run-up to general elections historically, and we do not expect any change in pattern for the May 2019 elections either, given that the overall infrastructure ordering pipeline across the central and various state governments is starting to look up.The full year order inflow ahead of the 2009 and 2014 elections was 23 per cent in both years, while revenue growth stood at 36 per cent and 10 per cent, respectively.Order inflows in the election year did not deviate from the companys guidance in the past two general election years.Based on the historical trend, the Street expects order inflow growth in FY19 to be front-loaded.
Typically, however, the share of order inflows for infrastructure companies in the second half is significantly higher than the first half.
The Street is pricing in order inflow growth of 12-15 per cent in FY19 and FY20 as compared with an expectation of 2-3 per cent for FY18.
Order inflows in the first nine months of FY18 for LT grew 8 per cent to Rs 1.03 lakh crore; yet, the company has maintained a flattish order inflow guidance for FY18.