I had some investment in L&T technology services and L&T itself. Exited after i started seeing some information that created some ambiguity for me. By the way, i still respect this iconic company, but people who are running it are still humans. So i thought better be watchful sometimes and retail investors like me will be last one to know when there are bad news. This was happening when there were lots of other companies with corporate governance issues going down, i wish and hope that is not L&T though i dont have investment now:
I don’t see any merit in the Wire article.
- Infra projects are cleared and given by government. L&T just executes.
- Mindtree acquisition was a brilliant move. Hostile to whom. It had no promoter. Mr Soota founder was forced to move out and few directors with small holdings were calling shots.
- Cognizant bribery case - These are conspiracy theories which will float around as no one knows.
Yes, Mr Naik is larger than life figure in L&T. An acquintance is L&T Tech services CEO now and Mr Naik chairman. When he joined company as a junior member Mr Naik was already chairman.
Another 3100 crore win
I always tell family and friends:
"For every 5 bricks India lays, at least 3 will be laid by L&T"
Order flows non-stop
Cutting edge capabilities being recognized by government too. This allows them to bypass lot of red-tape, add agility and receive payments quickly.
Winning orders is one thing, executing them, with adequate financial, manpower and logistics is another. While winning orders will make thr order book presentable, it will increase execution risk too.
A not-quite-similar but analogous case is NBCC. The co. was did fine for a period of 5-7 yrs until thr swollen order book(with some of the orders directed frm incomplete defaulted builder projects) started causing execution problems.
You will be amazed by their execution capabilities spanning over decades. Some snippets
Orders increase execution risk.
Increased demand in any business increases execution risk. Do we invest in zero/-ve growth biz due to that.
@nav_1996 : -
- Regarding the annual review report u attached : - Take co’s own communication with skepticism always. No company showcases itself in a negative light. Here’s a counter point for reference :-
Seeking such disconfirming evidence makes our analysis more balanced.
- " Increased demand in any business increases execution risk "
With all due respect, not at all. This is all business\industry dependent. There are businesses where chasing volume growth really helps - it drops straight to the bottomline and might also strengthen the co’s competitive advantage.
On the other hand, there are certain industries where rapid growth is sure shot road to failure and rapid decline in business health. This happens when the corresponding expenses rise at a faster pace then business volume growth. In these businesses, a 5-10% steady growth is better than going for explosive 20-25% growth and losing out.
Not undermining your perspective in any way, just trying to seek and understand what is it that makes this business undervalued.
Disclosure :- Not invested. Analysis in progress and considering the complex business segments, seems it’ll take time to comprehend this
Execution risk is always there not only in Infra but in every sector. If L&T can’t execute then no one can at least in Infra. Strong order inflow indicates economic activity and that is one of the most important parameters for any company operating in Infra.
In fact, recently their CFO Mr. Raman said they are surprised with the pickup in economic activities and now playing a catch up. They never expected such orders in quick time. Can’t compare NBCC with L&T.
The point was not to compare NBCC and L&T, it was an e.g given to think in terms of business models - thr drivers and wat can go wrong.
Think as a business owner, the nature of this industry - to grow revenues you need a pipeline of orders, keeping on winning them based on certain parameters(one of which is cost) , the revenue streams are non-recurrent and thn u run a risk of those cost over-runs or time delays which will put pressure on profitability.
So yes, while winning orders is good that the co. is making efforts to grow and the economy is providing opportunities, one has to be aware that its profitable execution of these orders which will create the value.
Nd speaking of creating value, the co’s core business share price returns over last 10 yrs has been arnd 6-7% only, so wat is it that they’ll be doing right now which wasn’t done in the preceding period.
I had only heard and/or watched videos about 3D building of homes and spaces around the world. This news delights me, both as an Indian and as an L&T investor. The future is now!
One has to also consider the opportunity cost of investing in companies with not so good returns in the past, if the invested capital is big. Return of capital is important, capital is sacrosanct but so is opportunity cost. No matter the size of the company no matter the size of the order book, no matter the prestigious projects, no matter the talent, no matter the execution efficacy, if all this does not reflect as profit, it will be a learning experience.
I had a position in L&T in the past, no research, except for the basic understanding of the business and anecdotal experiences. I sold my position, came out of it after sometime. It was more than a year or year and half ago and I don’t know about the developments since then, so things may have changed. I don’t know if there is a change at the top level and a new regime will bring in a new era of profits.
From my experience I can compare L&T to a big IT services company, where in the employees are doing okay with decent hikes but the shareholders of the company don’t see much price appreciation. The IT company always bags new projects, the employees are always closing a project successfully and moving on to a next one, they get decent yearly hikes, life goes on okay for them but not to the shareholders of that company.
Maybe L&T is such a behemoth in infra, bags a lot of orders all over the country, no other company may compete with them. You can bet on its quality, trust its brand as a citizen of the country, but not an investor. The price CAGR moved at 8% for the past 5 years, and 4% in the past 10 years (from Screener), the nature of the sector is such, plagued by many factors, factors almost known to all. Along with the nature of the sector, there are other things to consider at times. One has to keep an eye on the regional news too where the company operates. Because sometimes there could be a price increase just because the DPR is up for a review, the news that the company has bagged an iconic project, mobilized work force, all of this vanishes with the change of power. The behemoth may take slow steps or announce losses.
With FD like returns, that too one in non linear fashion, this is definitely not a coffee can stock, not a compounding company, but a timed entry and exit stock, more of a technofunda bet.
Just my thoughts for what they are worth.
I also completely share your view point. On one hand , a good investor should always choose a fundamentally good stock but it’s also important to expect higher returns than other financial instruments , from equities. This company is definitely blue chip but the returns are not so great. Definitely not a coffee can stock as this is a heavy investment business.
Disc: Invested from lows from a medium term perspective.
It is important to understand return cycles and PE rating/derating. People who are new to markets will tell you consumption is secular and evergreen. But everything is cyclical.
Timelines are roughly taken as decades to illustrate the point. I am using two market leaders so we have best possible comparison.
2000s: was Infra cycle: L&T gave 40x (forty times no % ) returns and HUL was flat. L&T ended decade with very high PE and HUL with moderate PE.
2010s: was consumption cycle: HUL gave 10x returns and L&T is flat. L&T has very low PE and HUL has lifetime high PE
2020s: I don’t know but I will place my bets based on my understanding of last two decades.
People are still valuing this company as plain vanilla construction company.
This is more closer to technology company including portfolio of three subsidiaries. Nothing lower than 20 PE does justice to its capabilities and business visiblity.
DRDO and even defence PSUs finding L&T as cost effective and capable manufacturing partner
L&T story playing out nicely.
“It’s a problem of plenty at the moment,” said S. N. Subrahmanyan, chief executive officer at Larsen & Toubro.
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