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LARSEN & TOUBRO LTD (L&T)
PRICE: RS.1782
RECOMMENDATION: BUY
TARGET PRICE: RS.2051
FY11 P/E: 23.7X
q The L&T stock has fallen by 10% in the past few trading sessions possibly on concerns including likely lower order accretion during the quarter, increase in material prices and higher borrowing cost.
q We have been maintaining our accumulate rating on the company due
to limited upside to our target price. But with recent price correction,
upgrade the stock to BUY with target price of Rs.2051.
q Concerns include delay in order finalizations which may hamper the
company's ability to deliver on its order intake guidance.
Quantum of orders announced during the quarter have been on
the lower side
Based on the company's announcement during the company, the total orders announced by the company have been to the tune of Rs 94.7 bn, which is the lowest
during the current fiscal. The company does not announce all the orders that it receives during a quarter hence the actual order intake during the quarter is typically
35-50% higher. However, going by the lower quantum of orders announced during the quarter, it is possible that actual order intake may be a tad lower than expectations.
Likely pressure on the fourth quarter to deliver on order intake
guidance
Going by the actual order intake in H1 FY11 and order announcements in Q3 FY11,
it is likely that the company may have to garner orders worth Rs 320-350 bn in the
fourth quarter to meet its order intake guidance of Rs 870 bn in FY11. To put in
perspective, the company received orders worth Rs 156 bn and Rs 205 bn in Q1
FY11 and Q2 FY11 respectively. In the fourth quarter of the previous year, the company won orders worth Rs 238 bn, which was helped by some large fertilizer and
factory project orders.
The L&T-Galfar Consortium, through international competitive bidding, has been
awarded a US$764m order for the design and development of the New Salalah International Airport in the Sultanate of Oman. This is L&T's largest overseas EPC order. L&T's scope will be approximately US$500m and the order is to be completed
in 30 months. We believe this is a significant order win for L&T in the overseas
market. The Middle East comprises close to 4% of the order-book (total backlog at
H1 FY11 was Rs1,150bn), while other overseas geographies comprise ~2%. We
believe this is a significant positive seen in the backdrop of rise in crude prices
(translating into sustained thrust on infrastructure). FIFA 2022 has been awarded to
Qatar. This will result into significant investments in the infrastructure development
in Qatar over the next decade, probably starting as soon as 12 months from now.
Order book Scenario
At the time of announcement of Q2 FY11 numbers, the company reiterated its
guidance of 25% growth in order intake in the current fiscal. The company had
highlighted that order finalization is getting delayed especially in Roads and Oil and
Gas sector. Among the significant orders in the pipeline are
n Hyderabad Metro order: This is a Rs 120 bn order for construction of metrorail project in the city of Hyderabad. L&T's infrastructural development segment
had emerged as the lowest bidder for the project.
n NTPC-DVC bulk tender: NTPC had called for a retendering of the boiler package for supply of 11 units of 660 MW. There are likely to be three bidders (L&TMHI, BHEL and BGR) for the package to be divided between L1 (6 units) and L2
(5 units). BHEL is assured of atleast five units provided it is able to deliver at L1
price. Technical bids had been invited in Q3 FY11 post which commercial bids
will be invited and the order should get finalized in FY11.
The management has been quite optimisitic on the business environment and sees
far lesser scope for execution slippages. The company indicated that environmental
issues had affected quite a few projects (mainly steel and mining projects) but expected that the issues would get sorted out.
In terms of business scenario, the company indicated hectic activity in the BOP and
Power T&D sector. While the progress on generation capacity building has picked
up momentum, ordering of BOP and T&D spending has been lagging. The management expects significant opportunities in these segments.
Stock outlook
The third quarter numbers would be the next event for stock. The management's
outlook on order pipeline will be keenly watched by the street for any signs of
slowdown.
Valuation and Rating: Target price maintained at Rs 2051 (Rs
2022 earlier)
L&T is trading at 23.7x and 19.3x FY11 and FY12 earnings respectively. The stock
has traded in a PEx band of 10x to 30x one year forward earnings.
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