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L&T (LTOUF / LTORF, Neutral)
Bear Case: What can go wrong
Bear markets could delay capex and will lead to a further fall in business
confidence in India (2QFY12 below 2009), which could slow down order
inflows. We expect 10% fall in FY12E order inflows and a 5% growth in
FY13E inflows.
We expect a slower growth of 11-12% in parent sales over FY13-14E.
Further, expect 50bps fall in margin to ~11.5% over FY13-14E vs 12% in
FY12E. Consequently, we estimate a slow growth in parent earnings at 6.8%
CAGR over FY11-14E.
We expect parent core business to de-rate and trade at 12x 1-yr forward
PER (14% discount to base case multiple). Further, we factor-in higher
holdco discount at 50% to L&T Urban Infra and 30% to other subsidiaries.
Key risk ahead is transformation of L&T into Infra developer, which shall
expose it to interest rate cycles far more then in the past.
Base Case:
We cut our inflow growth to -5% (vs co. guidance of +5%) in L&T FY12E on
loss of big-ticket orders in power & metal and low business confidence in
India, below 2009. Assumed ~10-15% growth in FY13-14E inflows on low
base. We estimate ~16-17% growth in sales during FY13-14E.
Consequently, we cut our parent earnings by 3-5% over FY12-14E leading to
12% CAGR over FY11-14E (vs 19% over FY08-11).
In the Base case, we expect L&T (Parent) to de-rate and trade at 14x (15) 1-
yr forward earnings at lower end of PEG at 1x (of 1.0-1.5x during FY08-11).
To factor in parent EPS cut, de-rating of multiple we cut our PO by 8% to
Rs1520 (Rs1660) valuing stock at 17.3x Consol. EPS of Y13E.
Risk-Reward: Unfavorable
In the bear case, we expect the stock could trade down to 14.6x FY13E Cons
EPS at Rs1182/share (US$23.6) assuming parent core business to trade at
PE of 12x 1-yr forward EPS.
In the base case, we expect the stock to trade at 17.3x FY13E consol EPS at
Rs1520/share (US$30.4) valuing parent at PE of 14x 1-yr forward EPS.
Overall, given the cyclical downturn and shift in business model to asset heavy
Infra developer, risk-reward appears unfavorable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
L&T (LTOUF / LTORF, Neutral)
Bear Case: What can go wrong
Bear markets could delay capex and will lead to a further fall in business
confidence in India (2QFY12 below 2009), which could slow down order
inflows. We expect 10% fall in FY12E order inflows and a 5% growth in
FY13E inflows.
We expect a slower growth of 11-12% in parent sales over FY13-14E.
Further, expect 50bps fall in margin to ~11.5% over FY13-14E vs 12% in
FY12E. Consequently, we estimate a slow growth in parent earnings at 6.8%
CAGR over FY11-14E.
We expect parent core business to de-rate and trade at 12x 1-yr forward
PER (14% discount to base case multiple). Further, we factor-in higher
holdco discount at 50% to L&T Urban Infra and 30% to other subsidiaries.
Key risk ahead is transformation of L&T into Infra developer, which shall
expose it to interest rate cycles far more then in the past.
Base Case:
We cut our inflow growth to -5% (vs co. guidance of +5%) in L&T FY12E on
loss of big-ticket orders in power & metal and low business confidence in
India, below 2009. Assumed ~10-15% growth in FY13-14E inflows on low
base. We estimate ~16-17% growth in sales during FY13-14E.
Consequently, we cut our parent earnings by 3-5% over FY12-14E leading to
12% CAGR over FY11-14E (vs 19% over FY08-11).
In the Base case, we expect L&T (Parent) to de-rate and trade at 14x (15) 1-
yr forward earnings at lower end of PEG at 1x (of 1.0-1.5x during FY08-11).
To factor in parent EPS cut, de-rating of multiple we cut our PO by 8% to
Rs1520 (Rs1660) valuing stock at 17.3x Consol. EPS of Y13E.
Risk-Reward: Unfavorable
In the bear case, we expect the stock could trade down to 14.6x FY13E Cons
EPS at Rs1182/share (US$23.6) assuming parent core business to trade at
PE of 12x 1-yr forward EPS.
In the base case, we expect the stock to trade at 17.3x FY13E consol EPS at
Rs1520/share (US$30.4) valuing parent at PE of 14x 1-yr forward EPS.
Overall, given the cyclical downturn and shift in business model to asset heavy
Infra developer, risk-reward appears unfavorable.
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