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Execution starting to pick up
Signs of pick-up in execution in 2QFY11, reassures us that 2HFY11 is likely to see strong re-bound in revenue, helped by a decade-peak order backlog (3.0x TTM revenues). We maintain our revenue and APAT growth estimates of over 25% and 22% CAGR respectively over FY10-12E and remain positive on L&T’s long-term prospects. However, we believe that the stock is currently fairly valued, discounting FY12E earnings by 20.9x. We maintain our Neutral rating but increase target price to `2,100 (earlier `2,007), primarily due to increase in value assigned to financial subsidiaries.
Revenue beats ‘low’ expectations; growth guidance maintained at 20%
2QFY11 results came ahead of expectations, primarily led by revenues, which came ~5% higher than our and street’s estimates. The management indicated that execution is expected to pick up further in 2H and maintained its revenue growth guidance of 20% for FY11. The adjusted PAT for the quarter came ahead of estimates led by higher revenues and higher other income.
International business ordering yet to pick up
Order inflow in the company’s international operations (mainly in the Middle East) has continued to remain sluggish and has contributed only 6% to 1HFY11 order inflows. In terms of revenue it has contributed only 12% to 1HFY11 revenues, compared to 17.4% in FY10 (19% in FY09).
Development projects constitute high proportion of order inflows
28% of the order inflows in FY11 so far have been from the company’s own development projects. With orders from the Hyderabad metro project expected to be received by the E&C arm in the next few months, we expect a major chunk of current year’s order inflow (~35%) to be from own development projects. This will help meet the full-year inflow growth guidance of 25% and help boost margin for the E&C business (as orders from own SPVs generally command higher margins). However, these projects will also require significant equity funding from the balance sheet.
Strong growth ahead but fairly valued; maintain Neutral
L&T remains our long-term preferred play in the infrastructure sector thanks to its sustainable competitive edge, superior quality of earnings leading to high returns, and strong growth prospects. However, we believe the stock is currently fairly valued, discounting the FY12E earnings by 20.9x (which is near its 5-year average trading multiple). We maintain our Neutral rating with revised target price of `2,100 (from `2,007)
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