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LARSEN & TOUBRO LTD
PRICE: RS.1706 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1906 FY12E P/E: 20.4X
q We recently met the management of L&T.
q The company remains concerned on the power sector. Within real estate,
the company is optimistic on the affordable housing sector. Expects Rs
50-60 bn of roads sector orders to materialize in the current fiscal. Competition
in the O&G market continues to be stiff.
q Power sector contributed 32% of order intake in FY11 but reported a
56% yoy decline in Q1 FY12. Without a turnaround in the situation, the
company would struggle to meet order guidance of Rs 916 bn (implying
15% growth in FY12). Calculations indicate, if order intake in the power
sector remains at the previous year's level, then the non power sector
order intake needs to grow at 22% in FY12 to meet the lower end of
order intake guidance of Rs 916 bn.
q In view of the moderate upside to our target price of Rs 1906, we revise
rating to Accumulate on L&T.
Key Highlights
n The management is cautious of the business environment but has not seen significant
execution related issues so far. While there are some slow moving orders,
the share (6-8% of order backlog) of such orders has not deteriorated significantly.
While the transformer industry has been highlighting instances of client
delaying taking delivery of finished product, this has not been an issue for the
company.
n Given the current economic scenario, instances of project deferrals cannot be
ruled out. The company continues to monitor the situation closely. The management
indicated that in case a project gets cancelled, the company has enough
safeguards within the contractual terms to ensure that the costs as well as margins
are recovered from the advances paid by the client. The management has
been able to manage the situation when the project work at Lanjigarh alumina
refinery was halted.
n On execution front, the company confirmed that its subcontractors (prefers to call
them vendors) continue to face liquidity issues. Since these vendors tend to have
had a long association with the company and are considered to be partners, L&T
has been supporting them through higher advances to tide over the situation.
This partly explains the expansion in working capital.
n In terms of business scenario, the company remains concerned on the Power
generation sector. Order placement in this sector has virtually fallen to a trickle in
recent months due to issues related to coal availability, change in foreign government
policies on coal imports and SEB financials. The management indicated
that apart from NTPC bulk tenders worth 14.4 GW, the company has outlined
orders worth 15 GW consisting of its own development projects as well as external
projects. Given the uncertain situation, the outlook for order intake can vary
in a wide range (depending on its success in the bulk tenders).
n The company is seeing traction in the roads and commercial real estate as well
as affordable housing. The company has booked orders in these sectors in recent
weeks. The company targets to win Rs 50-60 bn of orders in the roads sector in
FY12. Within Railways, there are opportunities in expansion of existing as well as
new metro rail projects. A monorail project is also being contemplated for
Chennai. In Airports, there are no major opportunities in the domestic market
but expects possibility of orders from the Middle East market.
n The Oil and Gas market continues to be an area of concern as the company
appears to have ceded market share to foreign players. Recently, media reports
indicate that J R Mcdermott emerged as the lowest bidder for ONGC's Cluster 7
WHP with a price of $ 160 million. The second lowest is NPCC with $ 193 million
followed by SEW Infra- Ramunia with $ 210 million. However, L&T expects
good prospects for the upstream oil and gas in the Middle East market. In the
domestic market, media reports indicate that ONGC has order pipeline of Rs 60-
70 bn to be awarded by September 2011.
n On the Boilers and Turbine Generators (BTG) side, the company continues to
highlight its preparedness to cater to the entire gamut of power generation
project. The company's indigenization programme for manufacture of Boilers has
been running on schedule. The phased indigenization milestones is based on
weight (tonnage) as well as value of output.
n Regarding the impact of yen appreciation on its power generation equipment import,
the company indicated that it is making efforts to reduce the impact
through fast-tracking of indigenization and diversifying the component supply
from the European suppliers.
n The company expects to commission its shipyard at Katupalli by Dec 2011. The
company is currently executing an order for patrol vessels at this shipyard and at
Hazira. Outlook for this shipyard depends largely on the company's success in
winning naval vessel orders from the defence sector.
Despite the macro challenges, the management has maintained its guidance for 15-
20% growth in order intake in FY12. This implies that the company would have to
grow orders by 17% yoy in the July 2011-Apr 2012 period to reach the lower band
of the guidance at Rs 916 bn.
Power sector contributed 32% of order intake in FY11 but reported a 56% yoy decline
in Q1 FY12. Order finalization has slowed down considerably especially in the
power generation sector due to coal supply issues, soft merchant tariffs and SEB
financials. There has been hardly any power generation order that was awarded in
the past four months. Based on announced orders, we estimate close to 60% of
orders related to the power generation (BTG, BOP) and the balance were Transmission
line orders from india and Middle East.
Without a turnaround in the situation, the company would have to struggle to meet
order guidance of Rs 916 bn (implying 15% growth in FY12). Calculations indicate,
if order intake in the power sector remains at the previous year's level, then the non
power sector order intake needs to grow at 22% in FY12 to meet the lower end of
order intake guidance of Rs 916 bn. This could be a tall task given that most contracting
companies have reported sharp drop in order intake and have sounded circumspect
on their annual guidance.
Valuation and Rating: Revise rating to Accumulate with a target
price of Rs 1906 (Rs 1919 earlier)
On a FY12 basis, L&T is trading at 20.4x and 14.6x PE and EV/EBITDA respectively.
We revise rating to ACCUMULATE with a revised target price of Rs 1906 (Rs 1919
earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
LARSEN & TOUBRO LTD
PRICE: RS.1706 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.1906 FY12E P/E: 20.4X
q We recently met the management of L&T.
q The company remains concerned on the power sector. Within real estate,
the company is optimistic on the affordable housing sector. Expects Rs
50-60 bn of roads sector orders to materialize in the current fiscal. Competition
in the O&G market continues to be stiff.
q Power sector contributed 32% of order intake in FY11 but reported a
56% yoy decline in Q1 FY12. Without a turnaround in the situation, the
company would struggle to meet order guidance of Rs 916 bn (implying
15% growth in FY12). Calculations indicate, if order intake in the power
sector remains at the previous year's level, then the non power sector
order intake needs to grow at 22% in FY12 to meet the lower end of
order intake guidance of Rs 916 bn.
q In view of the moderate upside to our target price of Rs 1906, we revise
rating to Accumulate on L&T.
Key Highlights
n The management is cautious of the business environment but has not seen significant
execution related issues so far. While there are some slow moving orders,
the share (6-8% of order backlog) of such orders has not deteriorated significantly.
While the transformer industry has been highlighting instances of client
delaying taking delivery of finished product, this has not been an issue for the
company.
n Given the current economic scenario, instances of project deferrals cannot be
ruled out. The company continues to monitor the situation closely. The management
indicated that in case a project gets cancelled, the company has enough
safeguards within the contractual terms to ensure that the costs as well as margins
are recovered from the advances paid by the client. The management has
been able to manage the situation when the project work at Lanjigarh alumina
refinery was halted.
n On execution front, the company confirmed that its subcontractors (prefers to call
them vendors) continue to face liquidity issues. Since these vendors tend to have
had a long association with the company and are considered to be partners, L&T
has been supporting them through higher advances to tide over the situation.
This partly explains the expansion in working capital.
n In terms of business scenario, the company remains concerned on the Power
generation sector. Order placement in this sector has virtually fallen to a trickle in
recent months due to issues related to coal availability, change in foreign government
policies on coal imports and SEB financials. The management indicated
that apart from NTPC bulk tenders worth 14.4 GW, the company has outlined
orders worth 15 GW consisting of its own development projects as well as external
projects. Given the uncertain situation, the outlook for order intake can vary
in a wide range (depending on its success in the bulk tenders).
n The company is seeing traction in the roads and commercial real estate as well
as affordable housing. The company has booked orders in these sectors in recent
weeks. The company targets to win Rs 50-60 bn of orders in the roads sector in
FY12. Within Railways, there are opportunities in expansion of existing as well as
new metro rail projects. A monorail project is also being contemplated for
Chennai. In Airports, there are no major opportunities in the domestic market
but expects possibility of orders from the Middle East market.
n The Oil and Gas market continues to be an area of concern as the company
appears to have ceded market share to foreign players. Recently, media reports
indicate that J R Mcdermott emerged as the lowest bidder for ONGC's Cluster 7
WHP with a price of $ 160 million. The second lowest is NPCC with $ 193 million
followed by SEW Infra- Ramunia with $ 210 million. However, L&T expects
good prospects for the upstream oil and gas in the Middle East market. In the
domestic market, media reports indicate that ONGC has order pipeline of Rs 60-
70 bn to be awarded by September 2011.
n On the Boilers and Turbine Generators (BTG) side, the company continues to
highlight its preparedness to cater to the entire gamut of power generation
project. The company's indigenization programme for manufacture of Boilers has
been running on schedule. The phased indigenization milestones is based on
weight (tonnage) as well as value of output.
n Regarding the impact of yen appreciation on its power generation equipment import,
the company indicated that it is making efforts to reduce the impact
through fast-tracking of indigenization and diversifying the component supply
from the European suppliers.
n The company expects to commission its shipyard at Katupalli by Dec 2011. The
company is currently executing an order for patrol vessels at this shipyard and at
Hazira. Outlook for this shipyard depends largely on the company's success in
winning naval vessel orders from the defence sector.
Despite the macro challenges, the management has maintained its guidance for 15-
20% growth in order intake in FY12. This implies that the company would have to
grow orders by 17% yoy in the July 2011-Apr 2012 period to reach the lower band
of the guidance at Rs 916 bn.
Power sector contributed 32% of order intake in FY11 but reported a 56% yoy decline
in Q1 FY12. Order finalization has slowed down considerably especially in the
power generation sector due to coal supply issues, soft merchant tariffs and SEB
financials. There has been hardly any power generation order that was awarded in
the past four months. Based on announced orders, we estimate close to 60% of
orders related to the power generation (BTG, BOP) and the balance were Transmission
line orders from india and Middle East.
Without a turnaround in the situation, the company would have to struggle to meet
order guidance of Rs 916 bn (implying 15% growth in FY12). Calculations indicate,
if order intake in the power sector remains at the previous year's level, then the non
power sector order intake needs to grow at 22% in FY12 to meet the lower end of
order intake guidance of Rs 916 bn. This could be a tall task given that most contracting
companies have reported sharp drop in order intake and have sounded circumspect
on their annual guidance.
Valuation and Rating: Revise rating to Accumulate with a target
price of Rs 1906 (Rs 1919 earlier)
On a FY12 basis, L&T is trading at 20.4x and 14.6x PE and EV/EBITDA respectively.
We revise rating to ACCUMULATE with a revised target price of Rs 1906 (Rs 1919
earlier).
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