Larsen & Toubro (L & T) Q4FY11 – Belying most concerns.:Macquarie Research

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Larsen & Toubro
Q4FY11 – Belying most concerns
Event
 L&T declared its 4QFY11 results with strong operating results. Revenues
were below expectations but compensated by margins. Highlight of the
earnings was order inflows in 4QFY11 (up 27% YoY) and guidance which was
better than expected on every count.
 We believe there are clear signs of some pick-up in the investment activity.
L&T is the best way to play the turnaround, given its diversification. Reiterate
L&T as our top pick, with a revised target price of Rs2,093 (from Rs2,215) due
to slightly lower revenues. We remain 8% ahead of consensus in earnings.
Impact
 Order inflow surprised in FY11, fair bit of confidence on FY12 guidance:
L&T reported Rs300bn of order inflows in 4QFY11 as against expectations of
Rs150-200bn. The company did not announce most of the orders due to client
confidentiality reasons. Guidance of 15-20% order inflow growth in FY12 after
delivering 15% growth in FY11 is encouraging. Order inflows in FY12 are
seen from gas-based power plants, road, oil and gas and fertilisers.
 Underlying margin performance robust, building lot of cushion for
margin pressure: L&T’s margin improved by 10bps to 15.2% in 4QFY11
despite non-cash charges like warranty provisioning for the Delhi T3 terminal
project and forex loss, totalling to Rs2.5bn. Management’s guidance of flat
margins (witn max 50-75bps decline) is conservative, in our view, as the
company has 70bps cushion from the reversal of these non-cash charges. We
are building in 20bps decline in margins in FY12 to 12.6%.
 We remain bullish on revenues and ahead of guidance: We are
forecasting 28% revenue growth in FY12 (ahead of L&T’s guidance of 25%)
as we believe that 30% growth in the order book in FY12, coupled with strong
execution in domestic E&C (30% of the order book), will drive this growth.
Earnings and target price revision
 We revise our earnings and target price marginally by 4-5%. Our revised
target price is Rs2,093 (from Rs2,215 earlier).
Price catalyst
 12-month price target: Rs2,093.00 based on a Sum of Parts methodology.
 Catalyst: pick-up in order inflow and execution
Action and recommendation
 Consensus needs to upgrade its estimates: Consensus’ bearish call on
margins has been proven wrong in FY11. We believe that enough room exists
for consensus to upgrade its FY12 EPS estimate of Rs72 upwards.
 Worst is behind us on investment cycle: Strong revenue growth and order
inflow pickup to us indicates that the worst of the investment cycle is over.
Strong activity in large scale orders is likely to pickup in 2HFY12.
 Stock trading at long term averages, maintain high conviction OP call:
L&T is available at a 30% discount to its long-term multiple of 21x. We retain it
as our top pick in the Indian large cap infrastructure space, as we remain
excited about its earnings growth.