InvestorQ : Why has the stock price of Larsen & Toubro (L&T) fallen so sharply in the last few weeks from its recent highs and what does the future hold for the stock?
Anu Biswas made post

Why has the stock price of Larsen & Toubro (L&T) fallen so sharply in the last few weeks from its recent highs and what does the future hold for the stock?

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Neelam Naik answered.
11 months ago
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Larsen & Toubro (L&T) has been on a downtrend for quite a few weeks and recently it touched a 9-month low price of Rs.1256. In fact, L&T has lost most of the gains it made in the previous year. Most of the concerns over the stock are over the lower order inflow and the consequent weaker revenue growth. The stock had touched a high of Rs.1528 in September and has since dipped close to 20% in less than 3 months. In fact, during the September quarter results announcement, the L&T management had maintained its guidance of 10-12% growth in order inflow. The problems are on the government orders front, so let me focus more on that aspect.

Firstly, there was a decision by the Andhra Pradesh government which had unilaterally most orders given by the previous Chandrababu Naidu government. In fact, under Jagan Mohan Reddy, the government has begun to review most of the capital investment orders, including the ones given to L&T. Then there is also the risk of delays in order awarding from the Maharashtra government post the change of government in the state. The state government under Uddhav Thackeray has promised to review most of the previous orders given by the Fadnavis government and has also put some orders on hold. In addition, the Government at the centre and the states have seen a worsening of fiscal stress which has resulted in a slowdown in public infrastructure capex.

You can quickly take a look at some of the specific orders that have come under a cloud. For example, orders worth Rs.16,000 crore pertaining to Andhra Pradesh as well as the Mumbai Coastal Road project are moving very slowly. Most analysts have also downgraded the L&T stock due to possibility of a near-term slowdown in construction activity in Maharashtra state owing to state elections and delay in formation of a new government. One way to understand the risks is through tender tracker. Tenders are down 41% year to date FY20 as of November 2019, indicating that order activity will likely remain low for H2FY20. Despite a strong order inflow momentum in H1FY20 for L&T, there is the potential for lowering guidance in Q3FY20 by 300 to 400 basis points. Since L&T is very vulnerable to order flows, this has impacted the stock in a big way. The pressure is likely to continue for now.

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