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Larsen & Toubro (LT)
Industrials
Weak inflows, margin & wcap as slowdown & competition bite; remain cautious.
L&T reflected weak business conditions with reduction in (1) order guidance (5% from
15-20% earlier - implied 2HFY12E growth of 18% may also be a tall task, (2) EBITDA
margin and (3) higher working capital & debt. We remain cautious as (1) cycle remains
weak, (2) competition has no signs of easing up and (3) in L&T’s long execution cycle
business weakness may linger and deepen more. Revise std. estimates (TP Rs1,425 from
Rs1,625) to Rs68 and Rs72.4 from Rs69 and Rs77 for FY2012E and FY2013E respectively.
Reduces inflow guidance to 5%; surprises with revised margin contraction guidance of 75-125 bps
L&T downgraded its order inflow growth guidance for FY2012E to 5% (15-20% earlier) – as
anticipated (we estimate a slight de-growth in FY2012E). The sharp downgrade was prompted by
(1) challenging business outlook and (2) delays in decision making process by several clients,
especially public sector. Company still needs to clock 18% yoy growth in 2H ordering to achieve its
guidance. It also believes that margin may contract by 75-125 bps (50-75 bps earlier) on (1) rising
commodity costs (a third of backlog have fixed price contracts) and (2) intensifying competition.
Infrastructure dominate inflows; sharp increase in international orders (hydrocarbon and T&D led)
L&T reported 21% yoy decline in 2QFY12 ordering to Rs161 bn. Infrastructure contributed 31% of
2Q inflows well supported by strong ordering in hydrocarbon segment (25% 2Q share versus 7%
in FY2011). International order inflows from ME increased sharply (Rs50 bn in 2Q alone versus
Rs64 bn in FY2011). In-house development projects did not contribute to the quarter’s inflows and
adjusted for this, order inflows from third parties were relatively flat on a yoy basis.
Reports in-line sales (up 20% yoy) and margin (down 40 bps yoy); PAT of Rs8 bn (up 15%)
L&T reported 1QFY12 standalone revenues of Rs112 bn (in line, up 20% yoy) led by E&C (Rs97 bn,
up 21%) and the E&E (Rs8.4 bn, up 26%) segments. EBITDA margin of 10.4% (in line) declined
40 bps yoy on higher employee cost (6,200 employees recruited, 16-17% wage inflation). PAT at
Rs8 bn (versus our estimate of Rs7.7 bn) was up 15% yoy. Balance sheet deteriorated on higher
debtors (support to vendors in a rising interest rate environment), increasing working capital/sales.
Revise estimates and target price to Rs1,425/share (from Rs1,625/share) reiterate REDUCE
We revise our standalone EPS to Rs68 and Rs72.4 (from Rs69.3 and Rs77) and consolidated EPS to
Rs78 and Rs87.5 (from Rs79 and Rs91.7) for FY2012E and FY2013E on lower ordering (4%
decline in FY2012 versus 2% growth) and margins. We value parent at 15XFY2013E with Rs393
of subs value (lower P/B multiple, alignment with trading Mcap, holding company discount). Retain
REDUCE (TP: Rs1,425) on weak demand, quality of inflows and increasing competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LT)
Industrials
Weak inflows, margin & wcap as slowdown & competition bite; remain cautious.
L&T reflected weak business conditions with reduction in (1) order guidance (5% from
15-20% earlier - implied 2HFY12E growth of 18% may also be a tall task, (2) EBITDA
margin and (3) higher working capital & debt. We remain cautious as (1) cycle remains
weak, (2) competition has no signs of easing up and (3) in L&T’s long execution cycle
business weakness may linger and deepen more. Revise std. estimates (TP Rs1,425 from
Rs1,625) to Rs68 and Rs72.4 from Rs69 and Rs77 for FY2012E and FY2013E respectively.
Reduces inflow guidance to 5%; surprises with revised margin contraction guidance of 75-125 bps
L&T downgraded its order inflow growth guidance for FY2012E to 5% (15-20% earlier) – as
anticipated (we estimate a slight de-growth in FY2012E). The sharp downgrade was prompted by
(1) challenging business outlook and (2) delays in decision making process by several clients,
especially public sector. Company still needs to clock 18% yoy growth in 2H ordering to achieve its
guidance. It also believes that margin may contract by 75-125 bps (50-75 bps earlier) on (1) rising
commodity costs (a third of backlog have fixed price contracts) and (2) intensifying competition.
Infrastructure dominate inflows; sharp increase in international orders (hydrocarbon and T&D led)
L&T reported 21% yoy decline in 2QFY12 ordering to Rs161 bn. Infrastructure contributed 31% of
2Q inflows well supported by strong ordering in hydrocarbon segment (25% 2Q share versus 7%
in FY2011). International order inflows from ME increased sharply (Rs50 bn in 2Q alone versus
Rs64 bn in FY2011). In-house development projects did not contribute to the quarter’s inflows and
adjusted for this, order inflows from third parties were relatively flat on a yoy basis.
Reports in-line sales (up 20% yoy) and margin (down 40 bps yoy); PAT of Rs8 bn (up 15%)
L&T reported 1QFY12 standalone revenues of Rs112 bn (in line, up 20% yoy) led by E&C (Rs97 bn,
up 21%) and the E&E (Rs8.4 bn, up 26%) segments. EBITDA margin of 10.4% (in line) declined
40 bps yoy on higher employee cost (6,200 employees recruited, 16-17% wage inflation). PAT at
Rs8 bn (versus our estimate of Rs7.7 bn) was up 15% yoy. Balance sheet deteriorated on higher
debtors (support to vendors in a rising interest rate environment), increasing working capital/sales.
Revise estimates and target price to Rs1,425/share (from Rs1,625/share) reiterate REDUCE
We revise our standalone EPS to Rs68 and Rs72.4 (from Rs69.3 and Rs77) and consolidated EPS to
Rs78 and Rs87.5 (from Rs79 and Rs91.7) for FY2012E and FY2013E on lower ordering (4%
decline in FY2012 versus 2% growth) and margins. We value parent at 15XFY2013E with Rs393
of subs value (lower P/B multiple, alignment with trading Mcap, holding company discount). Retain
REDUCE (TP: Rs1,425) on weak demand, quality of inflows and increasing competition.
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