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Larsen & Toubro |
Favorable Risk-to-Reward; Upgrade to ‘BUY’ |
BUY
CMP: Rs 1,681 Target Price: Rs 2,015
n Q3FY11 performance ahead of EMKAY and consensus estimates – revenues up 41% yoy to Rs114 bn and APAT up 32% yoy to Rs8.1 bn
n Notable disappointment is muted order inflows (-25% yoy to Rs134 bn) – implied run-rate jumps to Rs287 bn or 21% yoy for Q4FY11
n L&T reiterates guidance for FY11E – revenues growth 20% and stable operating margins – retain FY11E earnings of Rs69.1, but revise FY12E earnings by -3% to Rs82.4
n Risk-to-reward is favorable, post 21% fall in stock price in last 2 months – Upgrade from ‘ACCUMULATE’ to ‘BUY’ with revised target price of Rs2,015/Share (Rs2,129/Share earlier)
Strong revenue growth (+41% yoy), But margins disappoint (-160 bps)
L&T delivered strong performance in the quarter – ahead of EMKAY and consensus
estimates. The adjusted net profit increased 32% yoy to Rs8.1 bn, driven by (1) robust
revenue growth at 41% yoy to Rs114.1 bn – led by pick up in execution in Infrastructure
and Power orders and (2) high other income – up 67% yoy to Rs2.5 bn. However,
EBITDA margins surprised negatively with a 160 bps yoy decline 10.8% versus our
estimate of stable margins. Drop in EBITDA margins was linked to rise in input costs
and few projects not reaching margin recognition stage.
Order inflows disappoint as well – down 25% yoy to Rs134 bn
L&T witnessed muted order inflows during Q3FY11 – down 25% yoy and 35% qoq to
Rs134 bn (the lowest in the past 6 quarters). Weak order inflow was attributed to
continued deferral and delay in order finalization by the customers – especially in the
infrastructure and hydrocarbon space. Consequently, order backlog growth decelerated,
yet at a healthy 26% yoy (lowest in past 6 quarters) to Rs1149 bn.
But, L&T reiterates guidance on FY11E revenue and margins, but order
inflows can be missed
Despite disappointment on operating margins & order inflows in Q3FY11, L&T reiterated
it guidance and showcased confidence in achieving the same. It was largely based on a
satisfactory YTD 9MFY11 performance. L&T reiterated to achieve revenue growth
(+20%) and deliver stable operating margins in FY11E. But, order inflows can be
missed, if order finalization moves into next fiscal year. L&T believes Q4FY11E will be
crucial, large chunk of orders are expected to be finalized in Mar’11.
… Q4FY11E implicit growth rate has inched up
Q4FY11E implied rate has stepped up - order inflows of Rs287 bn (up 21% yoy) (excluding
power BTG orders) – equivalent to 40% of our FY11E target order flows (versus 9MFY11
performance – up 7% yoy to Rs496 bn). Infact, the implied run-rate for Q4FY11E jumps to
Rs375 bn (implied growth of 57% yoy) to achieve FY11E order inflow guidance of 25%.
Tweaking earning estimates, Maintain FY11E earnings and revise FY12E
earnings by -3%
9MFY11 performance is satisfactory with 22% yoy growth in revenues, 24% yoy growth in
operating profit and stable margins at 11.6%. With progress on expected lines and L&T
management reasonably confident to deliver its 20% revenue guidance, we maintain our
FY11E consolidated earnings of Rs69.1/Share. Despite L&T order inflow guidance pegged
at 25% for FY11E, we have factored a lower order inflow at 18%. Consequently, our implied
order inflow is Rs287 bn or 21% yoy growth in Q4FY11E. But citing probable postponement
in order finalization and resultant delays, we tweak our FY12E consolidated earnings and
revise downwards by 3% from Rs85/Share to Rs82.4/Share.
Risk-to-Reward very attractive, Upgrade from 'ACCUMULATE' to 'BUY'
L&T has delivered strong earnings performance in Q3FY11, ahead of EMKAY and
consensus expectation. Only notable disappointment is muted order inflows, which has
pushed to Q4FY11E. L&T has already corrected by 25% from its recent high of
Rs2171/Share on 5th November 2010 to Rs1670/Share on 17th January 2011. With L&T
typically (relation visible since April 2003) tracking its order backlog, risk-to-return profile
has become extremely attractive with worst-case downside of 8% to Rs1540/Share. We
upgrade L&T from 'ACCUMULATE' to 'BUY' with revised SoTP target price of
Rs2015/Share (versus Rs2129/Share earlier) with upside of 21%.
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