Larsen & Toubro – Turning cautious:: RBS

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We believe that L&T's order inflow guidance for FY11 could be at risk. We also expect slower
order flow to impact growth in FY12 and FY13. However, we believe the medium term outlook is
still strong and L&T is well geared for playing the India capex story. We maintain our Hold rating
with a revised TP of Rs1800.
Inflows likely to be sedate in 4Q11; order inflow growth could be at risk
Our discussions with various industry players indicate that ordering is likely to be sedate in
4Q11.This is due to delays in land acquisitions, clearances and increased due diligence following
recent scams. Some players are already cutting their inflow guidance. We believe L&T’s guidance
for 25% year-end order inflow growth (implying an inflow of Rs870bn) could be at risk. L&T
announced orders of Rs361bn in 1H11 and Rs117bn to date in 2H11. Even if one assumes
inflows of Rs160bn in 3Q, it would still need inflows of Rs349bn, 47% yoy growth, to hit guidance.
Slow ordering to impact FY12 and FY13 growth and return ratios
We expect slower ordering to impact growth in FY12 and FY13. At Rs1.15trn, the current order
book is at an all time high. However, longer gestation projects (e.g., power plants) have
dominated recent inflow and account for 47% of 1H11 inflows. Hence, we cut our FY11-13F sales
1-7% leading to our earnings forecasts for the period falling 3-10%. Also, we expect increased
demands on L&T’s balance sheet in the form of equity contribution given its role as an asset
owner and developer. Slowing inflows and increased execution cycles also leads to increased
working capital requirements, which in turn create additional balance sheet pressure and are
likely to subdue return ratios. We expect adjusted ROEs to decline from a high of 26% in FY07 to
c18% in FY12
Well geared for Indian capex story: Hold maintained
While the above factors may result in near-term issues, we believe L&T is the best geared to the
broad-based Indian capex story among Indian infrastructure companies. The current order book
(at Rs1.15trn) is at an all time high. L&T is getting into higher margin segments, like power and
shipyards. Emerging segments like defence, railways and nuclear power offer other opportunities.


We maintain our Hold rating with a revised target price of Rs1800, based on our estimate
changes and increase in WACC to highlight the current risk free rate.