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Larsen & Toubro
Going into Q4FY11 with low expectations
Event
L&T reports its crucial Q4FY11 earnings on 19th May. Street expectations are
very muted in relation to margins and order inflows, which limits downside for
the stock. L&T still remains one of the best ways to play the infrastructure
story in India. Maintain Outperform with a price target of Rs2,215.
Impact
Q4FY11 estimates 7% ahead of consensus: We are forecasting revenue of
Rs164.4bn, up 21% YoY, led by domestic E&C. We are building in a margin
decline of 50bps in this quarter, primarily in the electrical business, due to a
sharp movement in copper prices. Our PAT estimate is Rs16.4bn (up 22%
YoY on a recurring basis), which is 7% ahead of consensus.
Earnings expectations very low: The street is building in revenue growth of
only 17% in Q4FY11 despite the strong momentum in revenues in the last 2
quarters. The street has also factored in a large miss in order inflows in Q4,
due to no announcement of large wins.
Pick-up in order inflow announcement in Q1FY12 compared to Q4FY11:
L&T has announced orders worth US$1.1bn this week from power and oil&
gas sector, which is encouraging, given Q4FY11 was unusually very dry in
terms of order inflows.
GSPC order marks further inroads into deep-water development: L&T
has announced US$300m order for offshore process platform for GSPC to be
delivered in 2 years. L&T had received a US$230m order for offshore
wellhead platform from same customer. This now qualifies L&T to participate
in the large deep water development opportunity in India and overseas.
Earnings and target price revision
No change
Price catalyst
12-month price target: Rs2,215.00 based on a Sum of Parts methodology.
Catalyst: Q4FY11 earnings, guidance on order inflows and margins
Action and recommendation
Guidance on order inflow and margins critical: Impact on FY12 revenues
would be limited despite miss in order inflows in FY11. So street would be
more concerned on the outlook for margins and order inflows in FY12.
Expectations are already muted on these fronts.
Clarity expected on fate of electrical business: We would also look forward
to hear the future roadmap on the electrical business which is proposed to be
transferred to a subsidiary or any other external entity.
Downside limited in the stock from current levels: The stock is trading at
around 14x FY12 earnings (adj for subs). Valuations and low expectations
mean that risk reward is favourable for the stock at these levels. Retain OP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro
Going into Q4FY11 with low expectations
Event
L&T reports its crucial Q4FY11 earnings on 19th May. Street expectations are
very muted in relation to margins and order inflows, which limits downside for
the stock. L&T still remains one of the best ways to play the infrastructure
story in India. Maintain Outperform with a price target of Rs2,215.
Impact
Q4FY11 estimates 7% ahead of consensus: We are forecasting revenue of
Rs164.4bn, up 21% YoY, led by domestic E&C. We are building in a margin
decline of 50bps in this quarter, primarily in the electrical business, due to a
sharp movement in copper prices. Our PAT estimate is Rs16.4bn (up 22%
YoY on a recurring basis), which is 7% ahead of consensus.
Earnings expectations very low: The street is building in revenue growth of
only 17% in Q4FY11 despite the strong momentum in revenues in the last 2
quarters. The street has also factored in a large miss in order inflows in Q4,
due to no announcement of large wins.
Pick-up in order inflow announcement in Q1FY12 compared to Q4FY11:
L&T has announced orders worth US$1.1bn this week from power and oil&
gas sector, which is encouraging, given Q4FY11 was unusually very dry in
terms of order inflows.
GSPC order marks further inroads into deep-water development: L&T
has announced US$300m order for offshore process platform for GSPC to be
delivered in 2 years. L&T had received a US$230m order for offshore
wellhead platform from same customer. This now qualifies L&T to participate
in the large deep water development opportunity in India and overseas.
Earnings and target price revision
No change
Price catalyst
12-month price target: Rs2,215.00 based on a Sum of Parts methodology.
Catalyst: Q4FY11 earnings, guidance on order inflows and margins
Action and recommendation
Guidance on order inflow and margins critical: Impact on FY12 revenues
would be limited despite miss in order inflows in FY11. So street would be
more concerned on the outlook for margins and order inflows in FY12.
Expectations are already muted on these fronts.
Clarity expected on fate of electrical business: We would also look forward
to hear the future roadmap on the electrical business which is proposed to be
transferred to a subsidiary or any other external entity.
Downside limited in the stock from current levels: The stock is trading at
around 14x FY12 earnings (adj for subs). Valuations and low expectations
mean that risk reward is favourable for the stock at these levels. Retain OP.
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