This is one of the business we don’t like because of its huge growing debt burden. We know many investors will argue in this regards, that it is the nature of the business.

Truly agree with that point. What majorly Larsen and Toubro does is builds infrastructure for Government as well as for the private sector businesses. They are one of the biggest players in doing such kind of business (have competitive edge) and exactly 12 – 15 months back many people on the streets were expecting infrastructure to be built around Rs 1.5 lac crore to 1.8 lac crore. What exactly was spent and got delivered is completely different story. But if we look at the recent presentation of L&T, their order book had gone up by 14% in the year 2015 to Rs 256,500 crore.

The debt levels were very close to Rs 100,000 crore in the December 2015 and are growing faster than its order book and profits that were reported from the last five years. You cannot trust the reported profits as a real profits in these kind of businesses. They have not generated a single rupee from its operations from the last five years. This means they are running their business on the mercy of credit available to them from the market. As a banker or lender, I won’t mind lending money to L&T looking at their order book, as I do have assurance that my money will be recouped back.

In our view, the management is cashing up on its massive order book before it delivers to its client. This strategy is hurting to the shareholders of the business. In our view anything above 25% of its order book debt level should be alarming. We did talked about this business earlier on this blog that you can read here and here.

We do believe that Larsen is trading still at very expensive price and is not investment quality grade stock as per Valueoperations platform.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise to take professional advice before going ahead with our views.