Larsen & Toubro-Strong Q1 orders; sustainability a key concern :Nomura research

L&T has announced orders worth INR157bn in 1QFY13 so far (excluding
an order from Sadara Chemical Company, Saudi Arabia, for which the
order value has not been disclosed). Historically, disclosed order
proportion has been 60-80% of a total quarter’s inflows, and thus the
company could potentially end 1QFY13 with INR200-250bn worth of
overall inflows. The risk, though, remains that the share of disclosed
orders in 1QFY13 is higher than in prior quarters. Nevertheless, even with
L&T ending up in excess of INR160bn for 1QFY13 inflows, it would be
seen positively by the markets in our view. In the recent past, 1QFY13
orders have been ~23-24% of reported full-year inflows for the company;
however, this year, we believe, 1QFY13 has witnessed higher order
activity due to a carry-over of orders delayed from the previous year. As
such, the adjusted full-year run-rate seems to be between INR670-800bn,
which is higher than our current FY13 estimate of INR694bn.
Over the past few quarters and especially in 1QFY13, we note that order
inflow has been primarily driven by sectors such as building and
factories, roads and power T&D.

��


We also highlight below a chartbook on IIP data, cement dispatch
numbers and their correlation with L&T in the past. While we note a very
strong correlation between cement dispatch volumes and L&T order
inflow (both y-y growth trends), L&T’s inflows relate only modestly to the
IIP data. We also map L&T’s valuation, with IIP data and 10-year G-sec
bond yield, and find a strong correlation with bond yield rather than IIP
data, suggesting that any upcoming rate cut might potentially lead to
compression in valuation multiples; this follows from our strategist’s
arguments that cut in interest rates may not be a panacea for falling IIP
and, consequently, order inflow. Below we highlight two phases where
interest rates were falling but it was accompanied by a fall in growth
rates (please refer to Fig. 1). Also, historical evidence suggests that
falling rates, by themselves, are neither necessary nor sufficient for
market/L&T rerating.