Larsen and Toubro (L&T) has outperformed the Bombay Stock Exchange Sensex in the past month, mainly due to receipt of a string of new orders. However, it might be too early to predict if the company would be able to achieve its order inflow growth target of 15-20 per cent for 2012-13, say analysts, as orders in the first quarter usually do not form a major share of the total inflows in a financial year. Moreover, interest rates are still ruling firm and activity in the infrastructure space remains subdued, though there are hopes of action on the policy front from the government.
On the flip side, L&T will be among the biggest beneficiaries of any pick-up in the infrastructure sector. The recent decline in commodity prices will also be mildly positive for margins, as 30-35 per cent of the order book is on a fixed contract basis. At Rs 1,401, the stock’s valuation of 17 times 2012-13 estimated earnings (lower than its five-year historical average of over 20 times) also factors in the near-term risks.
While the overall mood is cautiously optimistic, the Street appears divided. Says Satyam Agarwal of Motilal Oswal Securities, “Current valuations adequately capture the macro headwinds towards investment climate. Downside is limited.” However, in a July 6 report, Amar Kedia, analyst, Nomura Equity Research, says, “The June quarter has witnessed higher order activity due to a carryover of orders delayed from the previous year but sustainability is a key concern.”
| NOT EXCITING | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Revenues | 53,171 | 60,126 | 67,393 |
| % change y-o-y | 21.1 | 13.1 | 12.1 |
| Operating profit | 6,283 | 6,996 | 7,751 |
| % change y-o-y | 11.8 | 11.3 | 10.8 |
| Adjusted net profit | 4,402 | 4,634 | 5,135 |
| % change y-o-y | 21.4 | 5.3 | 10.8 |
| EPS (Rs) | 72.3 | 76.1 | 84.3 |
| P/E (x) | 19.5 | 18.5 | 16.7 |
| E: Estimates Source: Company, Analysts reports | |||
Order inflows
For achieving the order inflow growth target, L&T needs to bag orders worth Rs 81,200-85,000 crore in FY13. “The company received Rs 16,670 crore in the last one and a half months across various segments, excluding the unannounced orders (which historically range at 20-40 per cent of total inflows in a quarter),” according to Kedia.
If the company maintains the current run rate, it will be able to achieve its targets, as the order inflow pipeline is strong in hydrocarbons, power transmission and distribution and railways—the company’s key focus areas. Agarwal is positive on L&T’s expectation, as he feels it demonstrates the ability to weather volatility much better than peers, despite continued challenges. Adds Sharekhan’s analyst, “Diversity continues to cushion overall financials in a tough business environment.”
However, the domestic macro environment has not improved enough to drive order inflows, and high interest rates while lack of policy action by the government persist. Hence, some analysts are sceptical. Says Sanjeev Zarbade, analyst, Kotak Securities, “The picture has been mixed so far, with the company winning a few large orders, but on the policy and interest rate fronts, there have been disappointment. Economic growth has continued to weaken and absence of appropriate policy responses is affecting investment sentiment in the infrastructure sector.”
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Also, competition continues to be tough in international markets (such as West Asia), a key growth driver for order inflows. Though the company does not expect a big variation in margins from 2011-12 (plus or minus 50 basis points), this remains a key monitorable.
This month, L&T’s Malaysian subsidiary, Tamco Switchgear (part of the electrical and automation division), acquired Henikwon Corporation, a leading manufacturer of low and medium voltage busduct systems, with three decades of experience. The acquisition will bring a customer base of large corporations, besides expanding Tamco’s offerings for building and infrastructure systems. Additionally, Henikwon will enhance presence in Southeast Asia; currently, Tamco has significant presence in Asia, Australia, Africa and West Asia.
Recently, L&T was in the news for a plan to raise $400-500 million by selling minority stake in its infrastructure development subsidiary, Infrastructure Development Projects Ltd (IDPL). This is good news from the perspective of the debt-equity ratio. As development projects are capital-intensive and interest rates are ruling high, the move will help fund some of its ventures in the development stage and ease balance sheet pressures.
In another development, an L&T-led consortium (including Tata Power and HCL) was chosen by the ministry of defence (MoD) to bid for a Rs 10,000-crore defence deal. This has significant long-term implications for L&T, believe analysts. Says Amit Mahawar, analyst, Edelweiss Securities, “For the first time, MoD has pitched a private player against an established public sector unit for defence deals and this event could, therefore, open a new window of opportunity for L&T, besides setting a trend for increased private participation in supply of defence equipment.” This could be a decent margin order, given the limited competition, he adds.
The company is also expected to sign joint venture agreements (Pipavav as its partner) with Mazagon Dock for orders worth $4 billion (submarines) of a total order size of $20 bn. The flip side is that IDPL’s ambitious Hyderabad Metro Project has been delayed by three years from the earlier 2014, while the previous project cost estimate of Rs 16,400 crore is also expected to go up.