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Macro concerns outweigh
positive guidance; downgrade
to Reduce
Action: Macro concerns outweigh management confidence; Reduce
L&T is one of the very few efficiently managed Indian infrastructure
companies and is also a leader in its category, but it is prey to macroeconomic
concerns. With corporate capex on the downswing and
infrastructure capex stuck in policy paralysis, we see no respite from
declines in order inflow in the medium term. To our and the Street’s
surprise, L&T management has guided for 15-20% order intake growth in
FY13, which we see as an extremely challenging task. Foreseeing
downside to this guidance, as well as being concerned about L&T’s
margins, working capital and balance sheet (asset-heavy from asset-light
on a consolidated basis), we believe that L&T will see further de-rating
over the medium term and thus downgrade our rating to Reduce.
Catalysts: Macro, orders and margins
We believe worsening macro conditions, disappointment on order inflow
guidance and margin squeeze will be key triggers for the stock’s de-rating.
Valuation: Cutting estimates and TP; downgrade to Reduce
In contrast to L&T’s guidance, we build in flat order inflow in FY13F that
leads to single-digit-percentage revenue growth in FY14F, of which ~23%
should come from lower-margin international markets (vs 12% now). We
thus build in a 180bp drop in margins over the next two years leading to
an overall ~10-30% cut in our earnings estimates over FY13-14F. Further,
a shift towards an asset-heavy model and medium-term macro headwinds
will likely pressurise ROEs, thus demanding a valuation de-rating. We peg
the stock at 10x FY14F EPS (average downcycle P/E) to arrive at our new
TP of INR992. Downgrade to Reduce on 19% downside to our new TP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Macro concerns outweigh
positive guidance; downgrade
to Reduce
Action: Macro concerns outweigh management confidence; Reduce
L&T is one of the very few efficiently managed Indian infrastructure
companies and is also a leader in its category, but it is prey to macroeconomic
concerns. With corporate capex on the downswing and
infrastructure capex stuck in policy paralysis, we see no respite from
declines in order inflow in the medium term. To our and the Street’s
surprise, L&T management has guided for 15-20% order intake growth in
FY13, which we see as an extremely challenging task. Foreseeing
downside to this guidance, as well as being concerned about L&T’s
margins, working capital and balance sheet (asset-heavy from asset-light
on a consolidated basis), we believe that L&T will see further de-rating
over the medium term and thus downgrade our rating to Reduce.
Catalysts: Macro, orders and margins
We believe worsening macro conditions, disappointment on order inflow
guidance and margin squeeze will be key triggers for the stock’s de-rating.
Valuation: Cutting estimates and TP; downgrade to Reduce
In contrast to L&T’s guidance, we build in flat order inflow in FY13F that
leads to single-digit-percentage revenue growth in FY14F, of which ~23%
should come from lower-margin international markets (vs 12% now). We
thus build in a 180bp drop in margins over the next two years leading to
an overall ~10-30% cut in our earnings estimates over FY13-14F. Further,
a shift towards an asset-heavy model and medium-term macro headwinds
will likely pressurise ROEs, thus demanding a valuation de-rating. We peg
the stock at 10x FY14F EPS (average downcycle P/E) to arrive at our new
TP of INR992. Downgrade to Reduce on 19% downside to our new TP.
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