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Larsen & Toubro (LT)
OW: Back with a bang
While Q4 earnings were 4% lower than expected, order
inflow growth of 27% surprised positively
Management’s confident push for 15-20% order inflow
guidance for FY12 improves visibility (HSBC est of 18%)
We believe recent stock underperformance offers attractive
opportunity; retain OW rating with a marginally lower TP of
INR2,187 (from INR2,341)
Stock up after good Q4 results; lot of steam left. L&T stock reacted sharply, up c6% after
company declared a meaningful jump in order inflows to INR303bn (+27% y-o-y, HSBC est
of INR273bn) although adjusted Q4 earnings of INR14.6bn (+9% y-o-y) was 4% below
consensus and 9% below HSBC est. Sales at INR154bn (+13% y-o-y) were c6% lower than
HSBC est, though compensated by a 10bps margin expansion to 15.2% (HSBC est of 14.9%).
The profit drag came primarily from higher depreciation due to change in depreciation policy.
Order inflow concerns put to rest. We were positively surprised by L&T’s Q4 FY11 order
inflows of INR283bn after the company had announced only INR135bn to media. We expect
L&T to report c18% order inflow during FY12 (unchanged) driven primarily by power,
infrastructure and hydrocarbons orders (Middle East Region). We read management’s
guidance of 15-20% growth for FY12 as conservative after underperforming in FY11 and any
upside should act a positive share price catalyst.
FY11 Consolidated earnings in line with expectation. L&T also reported consolidated
earnings of INR42.5bn and EPS of INR70.6 for FY11 (+22%, HSBC est of 21%). Subsidiaries
business contributed c16% of the consolidated earnings during FY11, which we expect to
increase to c22% by FY13, acting as a key share driver of the 26% CAGR over FY12-13.
Expect stock to re-rate over next 12 months. Retain OW rating with TP of INR2187
(INR2341 earlier). Our revised target price of INR2187 values the parent at 20x one year
forward EPS (22x earlier) and subsidiaries at INR457 (INR486 earlier). L&T has
underperformed the India market by c15% over the past six months on investor concerns
of slow down in order inflows and margin pressure. We believe signs of pick up in order
inflows are now visible and margin pressure has been factored in the stock price. Our
valuation pegs L&T’s valuation to improve from the existing 18x 12-month forward EPS
to c20x over the next 12 months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LT)
OW: Back with a bang
While Q4 earnings were 4% lower than expected, order
inflow growth of 27% surprised positively
Management’s confident push for 15-20% order inflow
guidance for FY12 improves visibility (HSBC est of 18%)
We believe recent stock underperformance offers attractive
opportunity; retain OW rating with a marginally lower TP of
INR2,187 (from INR2,341)
Stock up after good Q4 results; lot of steam left. L&T stock reacted sharply, up c6% after
company declared a meaningful jump in order inflows to INR303bn (+27% y-o-y, HSBC est
of INR273bn) although adjusted Q4 earnings of INR14.6bn (+9% y-o-y) was 4% below
consensus and 9% below HSBC est. Sales at INR154bn (+13% y-o-y) were c6% lower than
HSBC est, though compensated by a 10bps margin expansion to 15.2% (HSBC est of 14.9%).
The profit drag came primarily from higher depreciation due to change in depreciation policy.
Order inflow concerns put to rest. We were positively surprised by L&T’s Q4 FY11 order
inflows of INR283bn after the company had announced only INR135bn to media. We expect
L&T to report c18% order inflow during FY12 (unchanged) driven primarily by power,
infrastructure and hydrocarbons orders (Middle East Region). We read management’s
guidance of 15-20% growth for FY12 as conservative after underperforming in FY11 and any
upside should act a positive share price catalyst.
FY11 Consolidated earnings in line with expectation. L&T also reported consolidated
earnings of INR42.5bn and EPS of INR70.6 for FY11 (+22%, HSBC est of 21%). Subsidiaries
business contributed c16% of the consolidated earnings during FY11, which we expect to
increase to c22% by FY13, acting as a key share driver of the 26% CAGR over FY12-13.
Expect stock to re-rate over next 12 months. Retain OW rating with TP of INR2187
(INR2341 earlier). Our revised target price of INR2187 values the parent at 20x one year
forward EPS (22x earlier) and subsidiaries at INR457 (INR486 earlier). L&T has
underperformed the India market by c15% over the past six months on investor concerns
of slow down in order inflows and margin pressure. We believe signs of pick up in order
inflows are now visible and margin pressure has been factored in the stock price. Our
valuation pegs L&T’s valuation to improve from the existing 18x 12-month forward EPS
to c20x over the next 12 months.
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