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UBS Investment Research
L & T
3QFY11: Strong execution, weak
margins/order inflows
„ Strong execution, 10.8% margins in Q3; EBITDA grows 22% in 9mFY11
L&T reported Q3 (standalone) revenues of Rs114bn (+40% y/y, UBS-e Rs108bn),
EBITDA margins of 10.8% (UBS-e 11.5%) and pre-ex PAT of Rs8.1bn (UBS-e
Rs8.3bn; slightly ahead of street estimates of 7.8bn). In 9MFY11, revenues/PAT
have grown 22/18% y/y, with EBITDA margins of 11.4% (flat YoY).
„ 9mFY11 order inflow growth low at 8% y/y; guidance still maintained
Low order-intake in Q3 (-25% y/y; backlog at Rs1,149bn) was due to deferment in
ordering activity- attributable to various reasons including govt postponing
ordering, delays in clearances, political issues. However, L&T continues to have a
good strike rate and still hopes to achieve its guidance (25% y/y growth) if the
ordering activity actually happens (which it expects in Q4, especially March). L&T
stated that financial closure of Hyderabad Metro is on track (likely in FY11).
„ Margins impacted by commodity prices, early stage execution projects
Lower margins are due to higher commodity prices, change in job mix and many
projects not reaching margin-recognition threshold. It expects to maintain margins.
„ Valuation: Maintain Buy
Bunching of expected orders in yr-end increases chances of slippages (required Q4
growth is 57% y/y, 5% y/y ex metro order). Though a few months delay in some
orders is unlikely to have a significant business impact, it could impact the nearterm stock sentiment. Order announcements would drive the stock in our view.
Revenues: Revenues have increased 22% y/y in 9mFY11, led by domestic
projects. Exports, that contributed ~20% to revenues in 9mFY10, have declined
by over ~38% y/y in 9mFY11 (due to low order intake last year). The company
sees a pick-up in execution in infrastructure and power sectors
Margins: Lower margins in Q3 are attributed to 1) higher commodity prices
(steel/copper/silver), 2) change in job mix and 3) early-stage execution in many
power projects (that have not crossed margin-recognition threshold in the
quarter).
Variable-priced contracts: About two-thirds of the total orders have passthrough clauses (not specific to public or private orders). All the orders from the
Middle-East are fixed priced. The company is undertaking measures for better
pass-through clauses.
L&T Finance: The company is likely to wait for market stability for doing the
IPO.
Order book
Deferment of orders: Lower-than-expected order-intake is attributed to
deferment in ordering activity led by 1) delays by clients (likely due to volatility
in economic environment, though customers have not cancelled projects), 2)
government postponing ordering activity (reasons could be compulsions of
coalition government, not much work happening in last session of Parliament), 3)
political issues (Telangana, various scams/probes, upcoming assembly elections
in West Bengal/Tamil Nadu,), 4) delays in environmental clearances and land
acquisitions, 5) delays in coal-based projects due to postponements of coalblock allocations (discussion over Go-No Go areas), 6) delays in gas-based
projects (power plants, pipelines, fertilizers) due to lower gas production and 7)
to some extent financial problems of some customers (though this is not
significant).
Maintains 25% YoY order inflow growth guidance for FY11: In spite of the
lower order-intake in Q3, L&T is hopeful of achieving its guidance- it expects
strong ordering in Q4, especially in the month of March. Prospects are seen
across sectors (L&T highlighted that it continues to have a good strike rate,
except in hydro-carbon sectors due to aggressive pricing).
57% y/y growth in order flows is required in Q4 to meet its full-year guidance
(5% y/y excluding the Hyderabad metro order). Bunching of its expected orders
in year-end increases the chance of slippages. Though a few months delay in
some orders is unlikely to have a significant business impact, it could impact the
near-term sentiment on the stock. Order announcements would drive the stock
price in our view.
Hyderabad Metro project: The deadline for the financial closure of the project
is 4 th March 2011 and the company expects to book the order in FY11, provided
all the prior conditions are fulfilled by the Andhra Pradesh government (like
land acquisition). Substantial land acquisition has been already done by the state
government.
Middle-East: Orders have been delayed in the Middle-East too, though
expected to pick-up with the strength in oil prices. Lots of tendering activity is
currently underway in the hydrocarbon, T&D and also infrastructure segments
(though pricing has been aggressive in the hydrocarbon segment- by the
Koreans; L&T maintains that it will not chase orders at the cost of margins).
Current export orders primarily comprise of T&D, Salalah airport and
roads/bridges
Rail sector opportunities: Remains positive on the sector though currently
ordering activity is expected primarily in the metro and mono rail segments (and
in other areas not much is happening).
KPCL order will come in FY12: It is expected that this BTG order (JV with
KPCL for power plant) will accrue in FY12.
Pending orders from IDPL: Some urban-infra orders, part of Katupally port
project and Hyderabad metro. No IDPL orders are included in Q3 order flows.
PGCIL orders: Ordering activity is expected to pick-up in this quarter.
Road projects: The company is currently analysing Rs25bn worth of projects. It
highlighted that it is quite selective in bidding for road projects.
Some real-estate IT park related orders removed from backlog: L&T has
removed orders of some IT park projects (including Godrej) which were not
moving from some time. Total reduction in order backlog is about Rs20bn, that
includes this and also impact of forex fluctuations.
L&T IDPL: The Company purchased stakes from PE investors for ~Rs7bn in
and currently L&T holds 97.5% stake in IDPL.
Capex in FY11: Capex of Rs20-bn is expected (Rs10.8bn already spent).
Shipbuilding facility: The company expects that at the end of CY12 the facility
will be completed. It will primarily focus on manufacturing of defense vessels.
BTG: Revenue booking from BTG business has started from this quarter.
Balance Sheet: Net working capital continues to be low at 7.5% of sales. Such
levels are however unlikely to be sustained and it will increase over next few
quarters.
Higher Interest cost: During the quarter was due to 1) higher interest rates and
2) rise in borrowing levels.
Valuation
Our SOTP-based PT is Rs2,400 with a Buy rating.
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