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Larsen & Toubro (LT)
Industrials
FY2012E inflows assumptions also face challenge from competition, slowdown.
We attempt a plausible distribution of L&T’s inflows for FY2012E (Rs940 bn) based on
historical trend and sectoral opportunities. We believe that factors like competition
(roads, hydrocarbons), slowdown (metals, refining), clearances/politics (roads, railways)
may persist for FY2012E as well. Sensitivity suggests that 10-15% lower inflows in
FY12E and FY13E can impact earnings by 3-3.5% and 7-8%, respectively. Retain ADD.
Map out potential order inflow/sector mix for FY2012E; highlight several challenges
While we acknowledge that the diverse nature of L&T’s business spectrum makes it difficult to
accurately pinpoint potential business mix, we have attempted a plausible distribution of L&T’s
order inflows for FY2012E. We expect order inflows of Rs940 bn in FY2012E, 19% growth over
FY2011E inflows of Rs793 bn. The order inflows are likely to be led by the power and
infrastructure segments (each contributing about 32-37% of inflows). However, we believe that
several factors could potentially adversely impact the FY2012E inflows such as increased
competition (roads, hydrocarbons), sector slowdowns (metals, refineries), clearance/allocation
issues and political issues (roads, railways).
Needs additional Rs297 bn orders in 4Q to meet full-year FY2011E inflow estimate of Rs791 bn
We expect L&T to report order inflows to the tune of about Rs790 bn in FY2011E. This implies
additional order inflow requirement of about Rs290-300 bn in 4QFY11E in order to meet our fullyear estimate. This would be about 25% higher than 4QFY10 reported order inflows of Rs238 bn.
We have built in following orders in our 4QFY2011E estimates (1) potential Rs40-50 bn from part
of Hyderabad metro project (total project EPC size of about Rs90 bn) and (2) potential opportunity
from NTPC’s 11X660 MW boiler bulk tender (Rs50 bn).
Sensitivity: 10% lower inflows could impact earnings by 3-3.5% for FY12E and 7.5-8% for FY13E
We believe that lower order inflows could have a significant adverse impact on future earnings
and hence company valuations. We have analyzed the sensitivity of future earnings estimates to
order inflows in FY2011-13E. The exercise reveals that a 10% lower order inflow assumption in
FY2011-12E is likely to impact the FY2012E earnings by about 3-3.5%.
Retain ADD with target price of Rs1,850/share; would watch for margins and order inflow traction
We retain our estimates and our ADD rating on the company with a revised target price of
Rs1,850 (Rs2,050 earlier). We would watch for order inflow traction and margins recovery to be
more positive on the stock. Our target price revision is based on lower P/E multiple for the
standalone business (on lower inflow traction) to 18X FY2012E earnings from 21X earlier.
Needs additional Rs297 bn orders in 4Q to meet our full-year estimates
We expect L&T to report order inflows to the tune of about Rs790 bn in FY2011E. This
implies additional order inflow requirement of about Rs290-300 bn in 4QFY11E in order to
meet our full-year estimate. This would be about 25% higher than 4QFY10 reported order
inflows of Rs238 bn. Some of the key orders that would help meet our 4Q estimates include
(1) potential Rs40-50 bn from part of Hyderabad metro project (total project size of about
Rs120 bn) and (2) potential opportunity from NTPC’s 11X660 MW boiler bulk tender.
We also highlight potential downside risk to meeting our full-year inflow estimate for the
process and oil & gas segments which have remained relatively slow in FY2011E so far. We
expect these segments to contribute about 19% of the full-year inflows, i.e. about Rs149
bn—down 35% versus FY2010 inflows of Rs230 bn. L&T has reported inflows of only Rs69
mn from these segments in 9MFY11, implying inflow requirement of Rs80 bn in 4Q.
L&T has guided for full-year order inflow growth of 25% yoy for FY2011E, implying an order
inflow requirement of about Rs375 bn in 4QFY11E. The management has cited that a
majority of the expected orders are likely to be booked in March 2012.
Study on potential mix of order inflows for FY2012E; faces several challenges
We attempt to map out a likely distribution of L&T’s order inflows for FY2012E based on
historical order booking trend and potential sectoral opportunities. However, we do note
that L&T operates in a diverse spectrum of sectors, making it difficult to accurately pinpoint
potential business mix.
We currently build in order inflow assumption of Rs940 bn for FY2012E, a growth of 19%
over FY2011E inflow estimate. This is likely to be led by the power (Rs356 bn, 38% of total
inflows) and infrastructure (Rs300 bn, 32% of total inflows) segments. We expect process
and oil & gas segments each to contribute about 10-12% to the total inflows.
Factors resulting in sedate FY2011E inflows may adversely impact FY2012E as well
We believe some of the underlying reasons for the relatively sedate inflows in FY2011E may
also impact future inflows of the company as well. Some of the key factors which impacted
inflows include increased competition, sectoral slowdowns, clearance/allocation issues (land
acquisitions, environmental clearances, gas/coal allocations etc.) and political issues. The
exhibit below demonstrates exposure of L&T’s business segments to these various factors.
Power—expect 2-3 GW of orders each in EPC, BoP and equipment businesses
We expect power segment orders of Rs356 bn in FY2012E (about 38% of total inflows),
relatively flat over expected FY2011E inflows. This would be primarily led by
` Balance of Plant: We expect L&T to win Rs50 bn of BoP orders which is equivalent to
about 2-3 GW of power projects. However, the full-BoP sector is becoming incrementally
competitive with several players (BGR Energy, Lanco etc.) as well as smaller players scaling
up to win full-BoP orders (Tecpro Systems).
` EPC business: Our assumption of Rs100 bn EPC orders in FY2012E implies about 2 GW
of orders. This which would be partly be driven by potential in-house orders from L&T’s
joint venture with KPCL and the remaining from third party vendors.
` Equipment business: We build in Rs100 bn of equipment order (about 3.5-4 GW of BTG
orders) likely to be primarily led by the NTPC bulk tender (8X900 MW). The remaining is
likely to be met by third party orders.
` Electrification/ T&D: We expect L&T to win about Rs60 bn of electrification and T&D
business based on normal historical trend of the business.
Infrastructure—partly led by in-house development projects; likely to face stiff
competition in roads/irrigation sectors
Infrastructure segment is expected to contribute about 34% to the total inflows (about
Rs300 bn) primarily led by buildings and railway sector orders.
` Industrial/commercial buildings: We expect buildings segment to contribute almost a
third of the infrastructure orders (Rs100 bn) based on historical booking trend of L&T.
Note that L&T has booked orders to the tune of about Rs90-95 bn in FY2008 and FY2009
and has already booked orders of over Rs63 bn in 9MFY11 from this sector (based on
order announcements). However, we believe there could be a downside risk to this
number given a recent spate of orders from Mumbai.
` Railways: The expected railway sector order inflows of Rs90 bn in FY2012E is likely to be
partially led by order for the remaining portion of the Hyderabad metro project (about
Rs40-50 bn). The remaining orders would be met be metro, monorail and other railwayrelated businesses. Railways as a segment has typically been small for L&T apart from
Mumbai Monorail order during FY2009.
` Roads and bridges: We build in order inflows of Rs50 bn from the roads and bridges
segment likely led by an expected pick-up in ordering activity from NHAI. However, NHAI
orders remains intensely competitive potentially limiting margins and returns; L&T is likely
to be less interested in state-level road projects.
` Water: We expect Rs30 bn of order inflows from the water segment in FY2012E based
on historical inflow trend. However, the sector is likely to be very competitive.
Process segment: Slower-than-expected industrial capex momentum and likely lack
of near-term opportunities
We build in process segment order inflows of Rs94 bn in FY2012E. This is over expected
order inflows of Rs72 bn in FY2011E—a decline of 20% yoy (L&T has reported order inflows
of Rs40 bn in this segment in 9MFY11). We note several risks to potential orders from the
minerals & metals and refinery sectors.
` Minerals & metals: We expect some pick-up in inflows from the metals & minerals
segment in FY2012E. However, the sector faces several risks such as (1) slower-thanexpected revival in industrial capex activity, (2) large proportion of steel capacity addition
plans have already been ordered out (Bhushan Steel, Tata Steel etc.) and (3) L&T does not
play a major role in the Aluminium and Copper sectors.
` Refineries: We believe that orders for visible upcoming refinery capacities (IOCL’s Paradip,
HPCL’s Bhatinda etc.) are likely to have been already placed. Note that IOCL has already
spent about Rs45 bn (of the total Rs150 bn) on the Paradip refinery so far. We also
highlight that over the next few years the Indian refined products market is likely to face
and over-supply scenario and hence further capacity additions may still be far in the
future.
Hydrocarbons—steep competition (already witnessed in 3Q)
We have built in a strong recovery of ordering activity in the hydrocarbons segment in
FY2012E—40% yoy growth over an expected 45% decline in inflows in FY2011E. The
inflows from this segment in FY2011E so far have remained subdued—contributed 6% to
inflows in 9MFY11 versus 17% in 9MFY10. Management cited very steep competition in
this segment leading to loss of several orders (witnessed price difference of an average of
25% between L&T’s bid and the winning bid).
Sensitivity analysis: 10% lower inflows could impact earnings by 3-3.5% for
FY2012E and 7.5-8% for FY2013E
We believe that lower order inflows could have a significant adverse impact on future
earnings and hence company valuations. We have analyzed the sensitivity of future earnings
estimates to order inflows in FY2011-13E. The exercise reveals that a 10% lower order
inflow assumption in FY2011-12E is likely to impact the FY2012E earnings by about 3-3.5%.
Reiterate ADD with a target price of Rs1,850/share
We have retained our standalone earnings estimates of Rs63.6 and Rs73.7 and our
consolidated earnings estimate of Rs74.9 and Rs86 for FY2011E and FY2012E, respectively.
We cut our target P/E multiple on the standalone business to 18X FY2012E earnings from
21X earlier based on lower order inflow traction. We have correspondingly revised our
SOTP-based target price to Rs1,850/share (from Rs2,050/share) comprised of (1)
Rs1,333/share from the core construction business based on 21X FY2012E expected
earnings, (2) Rs238/share from L&T’s service subsidiaries, (3) Rs76/share from the
manufacturing subsidiaries, (4) Rs119/share from the infrastructure SPVs and (5) Rs94/share
from other subsidiaries and investments. The target price revision is primarily due to
increased value from the finance subsidiaries (L&T Finance, L&T Infra Finance) as additional
capital would aid growth and reduce pressure on the parent’s balance sheet.
We retain our ADD rating on the stock based on (1) incrementally positive on strong
execution, (2) legible explanation on lower margins in 3QFY11, (3) lower-than-expected
order inflows likely to be already factored into the price and (4) relatively reasonable
valuations of 16-17X FY2012E standalone earnings.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LT)
Industrials
FY2012E inflows assumptions also face challenge from competition, slowdown.
We attempt a plausible distribution of L&T’s inflows for FY2012E (Rs940 bn) based on
historical trend and sectoral opportunities. We believe that factors like competition
(roads, hydrocarbons), slowdown (metals, refining), clearances/politics (roads, railways)
may persist for FY2012E as well. Sensitivity suggests that 10-15% lower inflows in
FY12E and FY13E can impact earnings by 3-3.5% and 7-8%, respectively. Retain ADD.
Map out potential order inflow/sector mix for FY2012E; highlight several challenges
While we acknowledge that the diverse nature of L&T’s business spectrum makes it difficult to
accurately pinpoint potential business mix, we have attempted a plausible distribution of L&T’s
order inflows for FY2012E. We expect order inflows of Rs940 bn in FY2012E, 19% growth over
FY2011E inflows of Rs793 bn. The order inflows are likely to be led by the power and
infrastructure segments (each contributing about 32-37% of inflows). However, we believe that
several factors could potentially adversely impact the FY2012E inflows such as increased
competition (roads, hydrocarbons), sector slowdowns (metals, refineries), clearance/allocation
issues and political issues (roads, railways).
Needs additional Rs297 bn orders in 4Q to meet full-year FY2011E inflow estimate of Rs791 bn
We expect L&T to report order inflows to the tune of about Rs790 bn in FY2011E. This implies
additional order inflow requirement of about Rs290-300 bn in 4QFY11E in order to meet our fullyear estimate. This would be about 25% higher than 4QFY10 reported order inflows of Rs238 bn.
We have built in following orders in our 4QFY2011E estimates (1) potential Rs40-50 bn from part
of Hyderabad metro project (total project EPC size of about Rs90 bn) and (2) potential opportunity
from NTPC’s 11X660 MW boiler bulk tender (Rs50 bn).
Sensitivity: 10% lower inflows could impact earnings by 3-3.5% for FY12E and 7.5-8% for FY13E
We believe that lower order inflows could have a significant adverse impact on future earnings
and hence company valuations. We have analyzed the sensitivity of future earnings estimates to
order inflows in FY2011-13E. The exercise reveals that a 10% lower order inflow assumption in
FY2011-12E is likely to impact the FY2012E earnings by about 3-3.5%.
Retain ADD with target price of Rs1,850/share; would watch for margins and order inflow traction
We retain our estimates and our ADD rating on the company with a revised target price of
Rs1,850 (Rs2,050 earlier). We would watch for order inflow traction and margins recovery to be
more positive on the stock. Our target price revision is based on lower P/E multiple for the
standalone business (on lower inflow traction) to 18X FY2012E earnings from 21X earlier.
Needs additional Rs297 bn orders in 4Q to meet our full-year estimates
We expect L&T to report order inflows to the tune of about Rs790 bn in FY2011E. This
implies additional order inflow requirement of about Rs290-300 bn in 4QFY11E in order to
meet our full-year estimate. This would be about 25% higher than 4QFY10 reported order
inflows of Rs238 bn. Some of the key orders that would help meet our 4Q estimates include
(1) potential Rs40-50 bn from part of Hyderabad metro project (total project size of about
Rs120 bn) and (2) potential opportunity from NTPC’s 11X660 MW boiler bulk tender.
We also highlight potential downside risk to meeting our full-year inflow estimate for the
process and oil & gas segments which have remained relatively slow in FY2011E so far. We
expect these segments to contribute about 19% of the full-year inflows, i.e. about Rs149
bn—down 35% versus FY2010 inflows of Rs230 bn. L&T has reported inflows of only Rs69
mn from these segments in 9MFY11, implying inflow requirement of Rs80 bn in 4Q.
L&T has guided for full-year order inflow growth of 25% yoy for FY2011E, implying an order
inflow requirement of about Rs375 bn in 4QFY11E. The management has cited that a
majority of the expected orders are likely to be booked in March 2012.
Study on potential mix of order inflows for FY2012E; faces several challenges
We attempt to map out a likely distribution of L&T’s order inflows for FY2012E based on
historical order booking trend and potential sectoral opportunities. However, we do note
that L&T operates in a diverse spectrum of sectors, making it difficult to accurately pinpoint
potential business mix.
We currently build in order inflow assumption of Rs940 bn for FY2012E, a growth of 19%
over FY2011E inflow estimate. This is likely to be led by the power (Rs356 bn, 38% of total
inflows) and infrastructure (Rs300 bn, 32% of total inflows) segments. We expect process
and oil & gas segments each to contribute about 10-12% to the total inflows.
Factors resulting in sedate FY2011E inflows may adversely impact FY2012E as well
We believe some of the underlying reasons for the relatively sedate inflows in FY2011E may
also impact future inflows of the company as well. Some of the key factors which impacted
inflows include increased competition, sectoral slowdowns, clearance/allocation issues (land
acquisitions, environmental clearances, gas/coal allocations etc.) and political issues. The
exhibit below demonstrates exposure of L&T’s business segments to these various factors.
Power—expect 2-3 GW of orders each in EPC, BoP and equipment businesses
We expect power segment orders of Rs356 bn in FY2012E (about 38% of total inflows),
relatively flat over expected FY2011E inflows. This would be primarily led by
` Balance of Plant: We expect L&T to win Rs50 bn of BoP orders which is equivalent to
about 2-3 GW of power projects. However, the full-BoP sector is becoming incrementally
competitive with several players (BGR Energy, Lanco etc.) as well as smaller players scaling
up to win full-BoP orders (Tecpro Systems).
` EPC business: Our assumption of Rs100 bn EPC orders in FY2012E implies about 2 GW
of orders. This which would be partly be driven by potential in-house orders from L&T’s
joint venture with KPCL and the remaining from third party vendors.
` Equipment business: We build in Rs100 bn of equipment order (about 3.5-4 GW of BTG
orders) likely to be primarily led by the NTPC bulk tender (8X900 MW). The remaining is
likely to be met by third party orders.
` Electrification/ T&D: We expect L&T to win about Rs60 bn of electrification and T&D
business based on normal historical trend of the business.
Infrastructure—partly led by in-house development projects; likely to face stiff
competition in roads/irrigation sectors
Infrastructure segment is expected to contribute about 34% to the total inflows (about
Rs300 bn) primarily led by buildings and railway sector orders.
` Industrial/commercial buildings: We expect buildings segment to contribute almost a
third of the infrastructure orders (Rs100 bn) based on historical booking trend of L&T.
Note that L&T has booked orders to the tune of about Rs90-95 bn in FY2008 and FY2009
and has already booked orders of over Rs63 bn in 9MFY11 from this sector (based on
order announcements). However, we believe there could be a downside risk to this
number given a recent spate of orders from Mumbai.
` Railways: The expected railway sector order inflows of Rs90 bn in FY2012E is likely to be
partially led by order for the remaining portion of the Hyderabad metro project (about
Rs40-50 bn). The remaining orders would be met be metro, monorail and other railwayrelated businesses. Railways as a segment has typically been small for L&T apart from
Mumbai Monorail order during FY2009.
` Roads and bridges: We build in order inflows of Rs50 bn from the roads and bridges
segment likely led by an expected pick-up in ordering activity from NHAI. However, NHAI
orders remains intensely competitive potentially limiting margins and returns; L&T is likely
to be less interested in state-level road projects.
` Water: We expect Rs30 bn of order inflows from the water segment in FY2012E based
on historical inflow trend. However, the sector is likely to be very competitive.
Process segment: Slower-than-expected industrial capex momentum and likely lack
of near-term opportunities
We build in process segment order inflows of Rs94 bn in FY2012E. This is over expected
order inflows of Rs72 bn in FY2011E—a decline of 20% yoy (L&T has reported order inflows
of Rs40 bn in this segment in 9MFY11). We note several risks to potential orders from the
minerals & metals and refinery sectors.
` Minerals & metals: We expect some pick-up in inflows from the metals & minerals
segment in FY2012E. However, the sector faces several risks such as (1) slower-thanexpected revival in industrial capex activity, (2) large proportion of steel capacity addition
plans have already been ordered out (Bhushan Steel, Tata Steel etc.) and (3) L&T does not
play a major role in the Aluminium and Copper sectors.
` Refineries: We believe that orders for visible upcoming refinery capacities (IOCL’s Paradip,
HPCL’s Bhatinda etc.) are likely to have been already placed. Note that IOCL has already
spent about Rs45 bn (of the total Rs150 bn) on the Paradip refinery so far. We also
highlight that over the next few years the Indian refined products market is likely to face
and over-supply scenario and hence further capacity additions may still be far in the
future.
Hydrocarbons—steep competition (already witnessed in 3Q)
We have built in a strong recovery of ordering activity in the hydrocarbons segment in
FY2012E—40% yoy growth over an expected 45% decline in inflows in FY2011E. The
inflows from this segment in FY2011E so far have remained subdued—contributed 6% to
inflows in 9MFY11 versus 17% in 9MFY10. Management cited very steep competition in
this segment leading to loss of several orders (witnessed price difference of an average of
25% between L&T’s bid and the winning bid).
Sensitivity analysis: 10% lower inflows could impact earnings by 3-3.5% for
FY2012E and 7.5-8% for FY2013E
We believe that lower order inflows could have a significant adverse impact on future
earnings and hence company valuations. We have analyzed the sensitivity of future earnings
estimates to order inflows in FY2011-13E. The exercise reveals that a 10% lower order
inflow assumption in FY2011-12E is likely to impact the FY2012E earnings by about 3-3.5%.
Reiterate ADD with a target price of Rs1,850/share
We have retained our standalone earnings estimates of Rs63.6 and Rs73.7 and our
consolidated earnings estimate of Rs74.9 and Rs86 for FY2011E and FY2012E, respectively.
We cut our target P/E multiple on the standalone business to 18X FY2012E earnings from
21X earlier based on lower order inflow traction. We have correspondingly revised our
SOTP-based target price to Rs1,850/share (from Rs2,050/share) comprised of (1)
Rs1,333/share from the core construction business based on 21X FY2012E expected
earnings, (2) Rs238/share from L&T’s service subsidiaries, (3) Rs76/share from the
manufacturing subsidiaries, (4) Rs119/share from the infrastructure SPVs and (5) Rs94/share
from other subsidiaries and investments. The target price revision is primarily due to
increased value from the finance subsidiaries (L&T Finance, L&T Infra Finance) as additional
capital would aid growth and reduce pressure on the parent’s balance sheet.
We retain our ADD rating on the stock based on (1) incrementally positive on strong
execution, (2) legible explanation on lower margins in 3QFY11, (3) lower-than-expected
order inflows likely to be already factored into the price and (4) relatively reasonable
valuations of 16-17X FY2012E standalone earnings.
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