L&T announced orders are down around 50% year-on-year to Rs 14,500 crore in the three months of October-December 2018, primarily due to exhaustion of large orders pipeline after a sharp order growth over the past four quarters, analysts at Deutsche Bank Research observed in a recent report.

The average size of orders dropped below Rs 1,000 crore per project, which is down 50% from 6-7 quarter average.

“Given announced orders, 4Q19 estimated orders requirement will be +23-29% y-o-y growth to meet L&T’s 10-12% orders growth guidance, which we believe could be challenging given the election period and slowdown in new project announcements… Hence, its order inflows guidance could be cut from 10-12% to 0-2%, in our opinion,” they said.

New project investments have been the lowest in 12 quarters at about `1 lakh crore for the three months ended December 31, 2018, indicating a slowdown in the Indian economy, latest data from Centre for Monitoring Indian Economy (CMIE) shows. According to some media reports, this number is lowest in 14 years, and has been lowest since mid-2004. The analysts at Deutsche Bank had cut order inflow estimates by 14-15% in December 2018 as their order tracker showed a sharp reduction in the new order announcements (-28% for past 4 quarters), which should have a bearing on the new order inflows for the next four quarters.

However, capital goods players with more exposure to private capex, for instance Thermax, Cummins and Siemens are likely to fare better compared with L&T and BHEL which may get impacted due to the expected slowdown in government projects, analysts noted.

Despite a slowdown in fresh order intake, the execution is likely to remain strong. “We forecast good growth of 19% y-o-y in execution from past backlog, accompanied with +90 basis points increase in margins to 11.8% on crossing the margin threshold, leading to 33% jump in profits to Rs 1,990 crore”.