India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro – 3QFY2011 Result Update
Angel Broking recommend Buy on Larsen & Toubro with a Target Price of Rs1,964.
Larsen and Toubro (L&T) posted mixed set of numbers for 3QFY2011. On the
order book front, as on 3QFY2011 L&T had an order backlog of `1,14,882cr
while order inflow was disappointing at `13,366cr (25% yoy decline). The
company has maintained its revenue guidance of 20% for the full year, which we
believe is achievable. However, according to us L&T would find it tough to meet
its guidance of 25% on the order inflow front (implying order inflow of `37,509cr,
a 57% yoy jump) for the year, and there could see some slippage.
Top-line above estimates, margins tad below bottom-line ahead of estimates:
L&T reported robust top-line growth of 40.5% yoy to `11,413cr (`8,122cr), above
our estimate of `10,202cr, mainly on account of pick up in E&C segment which
recorded 45% yoy growth in top-line to `9,831cr. EBITDA came in below our
expectations mainly on account of the higher-than-anticipated material cost
owing to increase in commodity prices. Thus, EBITDA margin stood at 10.8% v/s
our expectation of 11.3%. Adjusting for extraordinary income (`35.3cr) and
dividend from subsidiaries, bottom-line grew 29.8% to `796.7cr and surpassed
our estimate of `720cr.
Outlook and Valuation: L&T has a healthy order book, which provides revenue
visibility for the next few years. We believe that even if the company misses its
inflow guidance of 25% for the year, sluggish order inflow is not a long-term
concern. Management also indicated delays rather than major cancellation of
orders, which it expects to make good in the ensuing quarters. Thus, post the
recent correction of ~20%, we believe that it is a good opportunity for long-term
investors to enter the stock at current levels. We recommend a Buy on the stock,
with a Target Price of `1,964.
Top-line above estimates… L&T reported a robust top-line growth of 40.5% yoy to
`11,413cr (`8,122cr) for the quarter, which was above our estimate of `10,202cr
mainly on account of the pick up in the E&C segment, which recorded 45% jump
in top-line to `9,831cr. The BTG segment has also started contributing to
revenues. The MIP segment posted decent yoy top-line growth of ~15% led by
increased off-take in the industrial valves and mining and construction equipment
business. The E&E segment sales came in below expectations and posted a yoy
growth of ~11% mainly on account of deferment of orders in the engineered-toorder-
business.
…but order inflow disappoints: During the quarter, the company knocked off slowmoving
orders of `2,000cr from its order book. These pertain to some real estate
projects – Godrej and Nesco. Thus, order inflow during 3QFY2011 stood at
`13,366, down 24.9% yoy. Management highlighted that order inflows were
impacted by the delays in the tendering process (environmental approvals/land
acquisition, etc), political issues, etc. Going ahead, management stated that there
several order finalisations were coming up in March 2011. The Hyderabad metro
order (`15,000cr) is also expected to achieve financial closure in March. However,
a delay of one-two months could impact their 25% growth guidance for FY2011.
Management highlighted that order booking depends on completion of basic
engineering post which it would materialise only in FY2012. The KPCL (2x800MW)
power plant MoU is also expected to get converted only in FY2012.
EBITDA margins a concern: On the EBITDA front, the company reported lowerthan-
expected performance primarily on account of the higher-than-anticipated
material costs owing to increase in the commodity prices (copper and silver).
Therefore, the company reported EBITDA margin of 10.8% v/s our expectation of
11.3%. Management indicated that margins were also impacted with some power
projects not reaching the margin recognition threshold levels. Going ahead, we
believe that margins would be under pressure given the rising trend in the
commodity prices. Hence, we believe that the company has achieved peak
margins in FY2010. On the bottom-line front, the company reported yoy growth of
10.8%. Adjusting for extraordinary income (`35.3cr) and dividend from
subsidiaries, bottom-line grew 29.8% yoy to `796.7cr.
Subsidiary performance
L&T InfoTech registers decent performance
The technology subsidiary, L&T InfoTech, reported a decent performance for
3QFY2011 reporting 18.0% yoy and 2.7% qoq growth in revenues. On the
profitability front, the subsidiary reported NPM at 12.1%. For 9MFY2011, the
company recorded 21.7% yoy revenue growth and 100bp improvement in NPM
on the back of effective cost controls and better utilisation.
The numbers of the finance subsidiaries were not announced given the SEBI norms
as the DRHP has been filed.
Order book analysis
L&T registered disappointing order inflow of `13,366cr during 3QFY2011. Orders
to the tune of ~88% for 9MFY2011 came from the local market, taking the
company’s outstanding order book to `1,14,882cr. L&T’s order book is majorly
dominated by the power (37%) and infrastructure (32%) segments. Process (11%),
hydrocarbon (14%) and others (6%) constitute the balance part of the order book.
Export orders witnessed some pick up especially in the T&D space and contribution
to the 9MFY2011 order inflow was 12% (majorly from the Middle East).
The company has maintained its yearly order booking guidance of 25%. However,
the task seems to be tough as the 25% guidance for the year implies order inflow
of `37,509cr, a 57% yoy jump. Hence, we believe there are chances of slippage
on the order inflow front.
Client-wise, 46% of L&T’s outstanding order book comes from the public sector,
with 40% coming from the private sector, and captive work orders accounting for
the balance 14%. Notably, there has been a drop in the share of public sector,
which management has cited as not being a concern and guided to see a revival
in the ensuing quarters.
Outlook and Valuation: Post the recent slide, we recommend a Buy
The macro outlook for infrastructure in general, and the consequent benefits for
L&T in terms of order inflows in particular, remain strong. We believe that the
company will continue to occupy a unique position in the Indian engineering and
construction (E&C) space as a diversified and large engineering play, with
exposure to areas ranging from power, defence, nuclear to equipment.
At the CMP of `1,680, the stock is trading at 24.8x FY2012E earnings and 4.1x
FY2012E P/BV, on a standalone basis. We have used the sum-of-the-parts (SOTP)
methodology to value the company to capture all its business initiatives and
investments/stakes in the different businesses. Ascribing separate values to its
parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and
MCap basis, our fair value works out to `1,964, which provides 16.8% upside
from current levels. We recommend a Buy on the stock.
It may be noted here that the L&T stock has historically traded at a premium to the
BSE Sensex. At our SOTP Target Price, the stock would trade at 29.0x FY2012E
standalone EPS of `67.8, which is at a premium of ~70% over Angel’s FY2012E
Sensex Target P/E multiple of 17x.
On one-year forward P/E basis, historically L&T has traded at an average P/E
of 26.6x, 29.4x and 28.6x over the past seven, five and three years,
respectively. Thus, our implied target P/E multiple of 29.0x is in line with its
historical average
Investment Arguments
Proxy to India's infra story: We believe that L&T is in an enviable position, given the
apparent shortage of good quality constructors in India. It is in a position to
choose its contracts and negotiate for price variation clauses. L&T's strong balance
sheet, a sound execution engine, wide array of capabilities, integrated operations
tailored to suit India's infrastructure growth story and multiple, recurring valueunlocking
triggers over the medium term, lead us to place faith in this default India
infrastructure story. L&T has an order book of >`1trillon, lending revenue visibility.
With signs of pick up in execution, management has guided for an improving
scenario and we also believe that most of the pieces are falling into place for the
company.
Well-capitalised balance sheet funding the expansion: L&T has a well-capitalised
balance sheet, at a debt-equity ratio of 0.4x as of 9MFY2011, in spite of having a
strong portfolio of assets and having invested in future growth areas. We believe
that the key factors for the same are: 1) high margins, and 2) better working
capital management.
Great infusion-dilution opportunity: Investment in the construction segment is
expected to double over the Eleventh Plan period, and the PPP model is assuming
greater significance in delivering and meeting physical targets in the different
segments of the Infrastructure space. The government, through Regulatory
changes, is focusing on the construction segment through the PPP mode of
investment. It expects the PPP share in the Eleventh Plan to be 30%, as against a
mere 19.8% in the Tenth Plan. This has become imperative due to the widening
gap between the demand for infrastructure and financial resources available with
the government to fund the same. Given the high growth opportunities present in
L&T's varied business verticals (Infrastructure and Finance), we feel that the
company provides a great infusion-dilution opportunity. It should be noted that
such moves lead to short-term dilution in equity, leading to the EPS getting
temporarily depressed. However, it also shores up the net worth of the company,
which fuels its future growth. Further, it also serves as a benchmark for valuing the
entity.
No comments:
Post a Comment