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COMPANY QUICK COMMENT
We expect L&T to miss its order inflow guidance but the extent of the miss will be key. Our 4QFY11 inflow estimate is
55% below guidance. We expect revenue guidance to be met and full-year EBITDA margins to be stable y-y resulting
in 4QFY11 PAT growth of 26%. We believe it will be difficult for L&T to give confident order inflow guidance due to the
uncertain macro scenario. In our view, L&T’s long-term story remains intact and given the stock’s recent
underperformance, valuation (12.2x FY13F adj P/E) is attractive. We believe any weakness post 4QFY11 results would
be an opportunity to buy.
4QFY11 results preview: extent of order inflow miss, guidance to be key
Order inflow guidance to be missed; extent of miss is the key
L&T had guided for order inflow growth of 25% for FY11F over FY10 at the beginning of the year. Despite deterioration in the
macro environment, the company maintained that guidance after 3QFY11 results, although it indicated downside risks. The
guidance implies order inflows of INR375bn in 4QFY11F (INR870bn in FY11F). We believe the Street is building in some
disappointment but the extent of the miss will be key to the stock price reaction.
In our view, there can be a meaningful disappointment to this guidance. We expect order booking at INR170bn for the quarter
(INR665bn for FY11F). Note that L&T had won orders worth INR695bn in FY10 while it has announced only orders worth
INR495bn in 9mFY11. Therefore, order inflows below INR200bn for the quarter would mean "de-growth" in orders for full-year
FY11 compared to FY10.
Another key thing to watch out for is the ex-BTG (boiler turbine generator) ex-development orders. The company has booked
ex-BTG ex-development orders in the range of INR100-150bn in the last few quarters. This could fall below INR100bn in this
quarter, which would be a cause for concern for us.
Revenue guidance expected to be met
We expect L&T to meet its guidance of 20% revenue growth for the full year (implying 16% for 4Q). Execution picked up in 3Q
and the company had reported 41% growth y-y for the quarter. Also, revenues from the power equipment division (BTG) have
picked up, which should help post good revenue growth. 20% revenue growth guidance implies sequential growth of 38%,
which is in line with historic growth in 4Q over 3Q.
Stable operating margins achievable though downside risks remain
We believe there is some uncertainty around operating margins. On the positive side, many projects which are in early-stage
execution could reach the margin threshold. Note that 3QFY11 margins were low and the company attributed this fall to a
higher proportion of early-stage projects. Many of these projects should achieve margin threshold in 4Q which could be
positive for margins, in our view. Also, a pickup in sales could result in positive operating leverage.
On the negative side, though, an increase in input costs could affect margins, especially in the E&E and MIP divisions. An
increase in the proportion of revenues from BTG and development orders adds to the uncertainty, in our view.
The company has guided for stable margins vs. FY10. We build in an EBITDA margin of 13.0% for FY11F, in line with FY10
margins. This would imply a 4Q margin of 15.9%, an 80bp increase y-y.
Recurring PAT growth expected at 26%: We expect higher interest rates to have minimal impact on L&T due to its low
leverage. We look for recurring PAT at INR16.9bn in 4QFY11F, for 26% growth y-y
Difficult to give confident order inflow guidance
The order inflow outlook remains uncertain given the delay in policy decisions and a slowdown in corporate capex. In our view,
given the high level of uncertainty in the macro environment, it will be difficult for L&T to give confident order inflow guidance.
Our current estimate for FY12F order inflows stands at INR881bn, in line with Street expectations.
On FY12F revenues, we believe there could be some impact on the miss in order inflows this year, but it would likely be
minimal due to the strong order backlog of the company. We expect the company to guide for FY12F revenue growth in the
range of 15-20%.
Stock already pricing in some disappointment; long-term story intact
YTD, L&T has underperformed the market with the stock down 24% (vs. Sensex -12%). We believe that the stock is already
pricing in some disappointment in near-term order inflows.
In our view, L&T’s long-term story remains intact. We believe that L&T remains the best play on the India infrastructure theme.
Adjusted for subsidiary valuations, L&T is trading at 14.5x FY12F earnings and 12.2x FY13F earnings, which we consider
attractive. We reiterate our BUY rating on the stock and believe any weakness post 4QFY11 results would be an opportunity
to buy.
Valuation Methodology and Investment Risks: We value the stand-alone business at 17.5x FY13F earnings, at the mid-point of what we
believe is the trading range of 15-20x under current macroeconomic conditions. The value is INR1,517/sh. The subsidiaries are valued at
INR449/sh resulting in our target price of INR1,966/sh.Risks to our view: Higher-than-expected slowdown in order inflows, rising interest
rates, lower-than expected execution, a substantial increase in raw material prices and a higher risk premium are the key risks to our price
target.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
COMPANY QUICK COMMENT
We expect L&T to miss its order inflow guidance but the extent of the miss will be key. Our 4QFY11 inflow estimate is
55% below guidance. We expect revenue guidance to be met and full-year EBITDA margins to be stable y-y resulting
in 4QFY11 PAT growth of 26%. We believe it will be difficult for L&T to give confident order inflow guidance due to the
uncertain macro scenario. In our view, L&T’s long-term story remains intact and given the stock’s recent
underperformance, valuation (12.2x FY13F adj P/E) is attractive. We believe any weakness post 4QFY11 results would
be an opportunity to buy.
4QFY11 results preview: extent of order inflow miss, guidance to be key
Order inflow guidance to be missed; extent of miss is the key
L&T had guided for order inflow growth of 25% for FY11F over FY10 at the beginning of the year. Despite deterioration in the
macro environment, the company maintained that guidance after 3QFY11 results, although it indicated downside risks. The
guidance implies order inflows of INR375bn in 4QFY11F (INR870bn in FY11F). We believe the Street is building in some
disappointment but the extent of the miss will be key to the stock price reaction.
In our view, there can be a meaningful disappointment to this guidance. We expect order booking at INR170bn for the quarter
(INR665bn for FY11F). Note that L&T had won orders worth INR695bn in FY10 while it has announced only orders worth
INR495bn in 9mFY11. Therefore, order inflows below INR200bn for the quarter would mean "de-growth" in orders for full-year
FY11 compared to FY10.
Another key thing to watch out for is the ex-BTG (boiler turbine generator) ex-development orders. The company has booked
ex-BTG ex-development orders in the range of INR100-150bn in the last few quarters. This could fall below INR100bn in this
quarter, which would be a cause for concern for us.
Revenue guidance expected to be met
We expect L&T to meet its guidance of 20% revenue growth for the full year (implying 16% for 4Q). Execution picked up in 3Q
and the company had reported 41% growth y-y for the quarter. Also, revenues from the power equipment division (BTG) have
picked up, which should help post good revenue growth. 20% revenue growth guidance implies sequential growth of 38%,
which is in line with historic growth in 4Q over 3Q.
Stable operating margins achievable though downside risks remain
We believe there is some uncertainty around operating margins. On the positive side, many projects which are in early-stage
execution could reach the margin threshold. Note that 3QFY11 margins were low and the company attributed this fall to a
higher proportion of early-stage projects. Many of these projects should achieve margin threshold in 4Q which could be
positive for margins, in our view. Also, a pickup in sales could result in positive operating leverage.
On the negative side, though, an increase in input costs could affect margins, especially in the E&E and MIP divisions. An
increase in the proportion of revenues from BTG and development orders adds to the uncertainty, in our view.
The company has guided for stable margins vs. FY10. We build in an EBITDA margin of 13.0% for FY11F, in line with FY10
margins. This would imply a 4Q margin of 15.9%, an 80bp increase y-y.
Recurring PAT growth expected at 26%: We expect higher interest rates to have minimal impact on L&T due to its low
leverage. We look for recurring PAT at INR16.9bn in 4QFY11F, for 26% growth y-y
Difficult to give confident order inflow guidance
The order inflow outlook remains uncertain given the delay in policy decisions and a slowdown in corporate capex. In our view,
given the high level of uncertainty in the macro environment, it will be difficult for L&T to give confident order inflow guidance.
Our current estimate for FY12F order inflows stands at INR881bn, in line with Street expectations.
On FY12F revenues, we believe there could be some impact on the miss in order inflows this year, but it would likely be
minimal due to the strong order backlog of the company. We expect the company to guide for FY12F revenue growth in the
range of 15-20%.
Stock already pricing in some disappointment; long-term story intact
YTD, L&T has underperformed the market with the stock down 24% (vs. Sensex -12%). We believe that the stock is already
pricing in some disappointment in near-term order inflows.
In our view, L&T’s long-term story remains intact. We believe that L&T remains the best play on the India infrastructure theme.
Adjusted for subsidiary valuations, L&T is trading at 14.5x FY12F earnings and 12.2x FY13F earnings, which we consider
attractive. We reiterate our BUY rating on the stock and believe any weakness post 4QFY11 results would be an opportunity
to buy.
Valuation Methodology and Investment Risks: We value the stand-alone business at 17.5x FY13F earnings, at the mid-point of what we
believe is the trading range of 15-20x under current macroeconomic conditions. The value is INR1,517/sh. The subsidiaries are valued at
INR449/sh resulting in our target price of INR1,966/sh.Risks to our view: Higher-than-expected slowdown in order inflows, rising interest
rates, lower-than expected execution, a substantial increase in raw material prices and a higher risk premium are the key risks to our price
target.
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