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Larsen & Toubro (LT)
OW: Near-term concerns receding
Announced new orders during Q1 FY12 despite a strong Q4
have surprised us positively
We expect weak commodity prices during April-June 2011 to
help margin pressure concerns recede
Retain OW and TP of INR2,187. We believe news of new
orders will continue to catalyse the share price
Q1 FY12 order inflows have surprised us positively. L&T has announced INR107bn in
new orders (excluding the recently won road project) to date during Q1 FY12. A large
share of these orders comes from Real Estate, Power Transmission and Process (refer to
figure 2, page 2), which we have been highlighting along with Hydrocarbons as a key
potential growth area during FY12. While the first half of the year forms only c40% of
total new orders, sustained momentum despite a strong Q4 FY11 improves our visibility
for our above-consensus 18% y-o-y order inflow growth estimate.
Margin pressure should recede in the near term. Pure construction forms c50% of
L&T’s top line, which consumes cement, steel and aggregates as major components.
Further, fixed price contracts form c25-30% of the order book, which makes commodity
price inflation the single largest factor impacting EBITDA margins. However, after a
sharp rise during FY11, early indications suggest commodity prices have cooled off more
than 5% since April (refer to figure 3 on page 2). We take further comfort from HSBC’s
expectation of flat growth (with a negative bias) in steel prices during FY12 and c5-10%
drop in cement prices (channel checks suggest they have already turned weak in many
markets and are already down c5-10% in the state of Gujarat). A reduction in margin
pressure concerns will, in our view, act as an additional upside share price catalyst.
Retain OW with TP of INR2187. We foresee substantial long term value in L&T despite
the stock’s recent run-up on expectations of sustained new orders, which we believe will
be further augmented by hydrocarbons and power (excluding equipment) sector orders.
Our target valuation implies L&T’s current one-year forward PE of 20x will remain firm
over the next 12 months. Our target price of INR2,187 values the parent at 20x FY13 EPS
and subsidiaries at INR457, implying an exit consolidated PE of 19.6x.
Key charts/ tables inside the report: L&T’s order inflow breakdown; commodity price
trends; sector-wise announced order inflows across companies in the Indian Industrials
sector during Q1 FY12, highlighting L&T as the biggest beneficiary of new orders.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LT)
OW: Near-term concerns receding
Announced new orders during Q1 FY12 despite a strong Q4
have surprised us positively
We expect weak commodity prices during April-June 2011 to
help margin pressure concerns recede
Retain OW and TP of INR2,187. We believe news of new
orders will continue to catalyse the share price
Q1 FY12 order inflows have surprised us positively. L&T has announced INR107bn in
new orders (excluding the recently won road project) to date during Q1 FY12. A large
share of these orders comes from Real Estate, Power Transmission and Process (refer to
figure 2, page 2), which we have been highlighting along with Hydrocarbons as a key
potential growth area during FY12. While the first half of the year forms only c40% of
total new orders, sustained momentum despite a strong Q4 FY11 improves our visibility
for our above-consensus 18% y-o-y order inflow growth estimate.
Margin pressure should recede in the near term. Pure construction forms c50% of
L&T’s top line, which consumes cement, steel and aggregates as major components.
Further, fixed price contracts form c25-30% of the order book, which makes commodity
price inflation the single largest factor impacting EBITDA margins. However, after a
sharp rise during FY11, early indications suggest commodity prices have cooled off more
than 5% since April (refer to figure 3 on page 2). We take further comfort from HSBC’s
expectation of flat growth (with a negative bias) in steel prices during FY12 and c5-10%
drop in cement prices (channel checks suggest they have already turned weak in many
markets and are already down c5-10% in the state of Gujarat). A reduction in margin
pressure concerns will, in our view, act as an additional upside share price catalyst.
Retain OW with TP of INR2187. We foresee substantial long term value in L&T despite
the stock’s recent run-up on expectations of sustained new orders, which we believe will
be further augmented by hydrocarbons and power (excluding equipment) sector orders.
Our target valuation implies L&T’s current one-year forward PE of 20x will remain firm
over the next 12 months. Our target price of INR2,187 values the parent at 20x FY13 EPS
and subsidiaries at INR457, implying an exit consolidated PE of 19.6x.
Key charts/ tables inside the report: L&T’s order inflow breakdown; commodity price
trends; sector-wise announced order inflows across companies in the Indian Industrials
sector during Q1 FY12, highlighting L&T as the biggest beneficiary of new orders.
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