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Larsen & Toubro
Overweight
LART.BO, LT IN
Weak order flow concerns priced in, Reiterate OW
• L&T’s adjusted PAT at Rs8.1B (up 15.6%) came in 5.5% below our
estimate but above street estimate of Rs7.8B. Revenue growth was strong at
40% YoY while margins declined 155bps. As expected, L&T reported a
weak order flow of Rs134B (25% down YoY) and attributed it to
continuing project deferrals.
• We do not expect L&T to correct any further post the results: Order
flows primarily drive stock sentiment and the recent stock correction (14%
in 3 weeks) stemmed from expectation of weak order flow. Though
execution momentum is slightly ahead of expectations so far, margin
concerns owing to commodity price pressures have increased and capital
costs are higher. We reduce FY11 EPS est. by 2.8% - we now expect 21.6%
revenue growth, 60bps margin decline and 19.8% PAT growth in 4Q.
• Order flows – too much market focus on the near-term and quantity,
rather than quality: Markets are focusing on the big order inflow number
of Rs375B that L&T needs to report in the next 3 months to meet its
Rs870B guidance for the year (+25%). On this crucial data point, the
management is conceding to a risk of a few months’ delay, but yet believes
it is doable IF some large projects see traction. Widely touted are
Hyderabad Metro (Rs95B, funding target by 4th Mar) or portions thereof;
share in NTPC boiler order (total size of ~Rs110B), postponement of the
latter appears imminent. While an unprecedented bunching of orders, if any,
could be a compelling short-term trigger to the stock, we believe the
concentration risk is too high to take a 3-month bet. We cut the 4Q inflow
estimate to ~Rs309B, and thereby FY12 est. by ~4.0%. Also, in our view,
it’s not just the quantity but in-built margins, execution duration and funding
(lessons learnt by all players in the previous downturn) that are as important.
So far we are convinced that L&T is mostly doing the right things.
• Given our positive stance on the investment cycle, we believe L&T
makes a good one-year pick irrespective of our minor downgrade and
uncertainty surrounding near-term ordering. At 19.5x FY12E earnings, we
believe the risk of deferrment is factored in, and reiterate our OW rating
with March-12 PT of Rs2100 (previously Sep-11 PT of Rs2140). Data
points on weak quality of order flows, on the other hand, would make us less
positive.
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