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Larsen & Toubro (LART.BO)
Buy Equity Research
Impact of weak inflows on FY12 earnings muted; maintain Buy
What's changed
We continue to see weak project start activity across both industrial and
infrastructure sectors in India with only 5% of announced projects having
moved to actual ‘start’—posing downside risks to our below consensus
view on inflows this year. We favor L&T in this environment and expect
the focus to be on execution as the company executes its 2.5 years worth
of accumulated orders.
Implications
L&T has among the lowest sensitivity of next year revenues to fresh
inflows (given large book coverage and 30-month execution period) – a
20% change in annual inflows would lead to less than 5% impact on next
12 months earnings.
Although order inflows for 4QFY11 (to be announced on May 19) may
surprise on the downside against our assumption of Rs220 bn and
company’s guidance of Rs310 bn, we do not see this as materially
impacting L&T’s next year earnings or longer-term prospects. Despite
potential near-term weakness in the stock price, we maintain Buy based on
the company’s mature order book profile, dominant market share in
industrial and infrastructure capex and stable to improving capital returns
(180 bp improvement in ROE over FY11E-FY13E).
Further, we reiterate key drivers: (1) stabilization in execution cycle for the
company (30-31 months for FY11E and FY12E), (2) improving returns over
next 2 years (as investments become operational) and (3) attractive current
valuations post the recent correction (down 23% ytd. vs. Sensex down 10%).
Valuation
The stocks currently trades at FY12E P/E of 18X vs. 5-year historical
median of 21.5X. We maintain our 12-m SOTP-based TP of Rs1,987.
Key risks
Aggressive bidding, further delay in orders, volatile commodity prices.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LART.BO)
Buy Equity Research
Impact of weak inflows on FY12 earnings muted; maintain Buy
What's changed
We continue to see weak project start activity across both industrial and
infrastructure sectors in India with only 5% of announced projects having
moved to actual ‘start’—posing downside risks to our below consensus
view on inflows this year. We favor L&T in this environment and expect
the focus to be on execution as the company executes its 2.5 years worth
of accumulated orders.
Implications
L&T has among the lowest sensitivity of next year revenues to fresh
inflows (given large book coverage and 30-month execution period) – a
20% change in annual inflows would lead to less than 5% impact on next
12 months earnings.
Although order inflows for 4QFY11 (to be announced on May 19) may
surprise on the downside against our assumption of Rs220 bn and
company’s guidance of Rs310 bn, we do not see this as materially
impacting L&T’s next year earnings or longer-term prospects. Despite
potential near-term weakness in the stock price, we maintain Buy based on
the company’s mature order book profile, dominant market share in
industrial and infrastructure capex and stable to improving capital returns
(180 bp improvement in ROE over FY11E-FY13E).
Further, we reiterate key drivers: (1) stabilization in execution cycle for the
company (30-31 months for FY11E and FY12E), (2) improving returns over
next 2 years (as investments become operational) and (3) attractive current
valuations post the recent correction (down 23% ytd. vs. Sensex down 10%).
Valuation
The stocks currently trades at FY12E P/E of 18X vs. 5-year historical
median of 21.5X. We maintain our 12-m SOTP-based TP of Rs1,987.
Key risks
Aggressive bidding, further delay in orders, volatile commodity prices.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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