Red Sea crisis a storm for L&T?
₹ 3,605.7, hit on Monday. On Tuesday, L&T said that its construction arm has bagged a “mega" order, valued between ₹ 10,000 crore and ₹ 15,000 crore for constructing a high-speed electrification system for the Mumbai-Ahmedabad bullet train project. This significant domestic contract is expected to bolster L&T’s order book and revenue stream.
While this bodes well, L&T's operations in West Asia, especially in light of the Red Sea crisis, could raise concerns over margins and execution. The impact, though, is likely to be minimal. Analyst Priyankar Biswas of BNP Paribas notes that L&T’s Middle East (West Asia) exposure by revenue (FY23) are largely to Saudi Arabia, the United Arab Emirates and Qatar.
The company does not have any material exposure to either Israel or Yemen, which means there is no exposure to direct conflict zones. Nearly 84% of L&T’s international order book comes from Saudi Arabia. Ankita Shah, vice president, research - institutional equities, Elara Securities (India) highlighted that projects in Saudi Arabia are executed locally, mitigating risks associated with execution or supply chain disruptions.
As such, order inflows are unlikely to be affected by the regional conflicts. Analysts pointed out there has been no negative news flow on execution disruptions. In the half year ended September (H1FY24), L&T saw a 148% year-on-year growth in international order flows, leading to a 65% jump in total order inflow to ₹ 1,54,700 crore.
Of this, 41% of order inflows came from West Asia, contributing to 18% of revenues. Having said that, higher freight costs could marginally hurt profitability. “Red Sea conflict has led to sharp rise in ocean freight almost like 2-3 times in the last one month.
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