Analysts are trimming order inflow and revenue growth estimates, as macro environment has deteriorated.
Larsen & Toubro’s stock touched its 52-week low of Rs 1,348.65 on Thursday before closing slightly higher at Rs 1,373.55. Macroeconomic concerns, leading to slower spending on infrastructure and capacity creation, have turned the market cautious on the stock. The outlook for order inflows continues to be challenging and, unlike earlier, many experts now believe the reversal in interest rates is still some time away.
Analysts fear the company would be compelled to revise its guidance (expectation) on growth in order inflows and a top line of 15 per cent and 25 per cent, respectively for 2011-12. The next financial year (2012-13) is also unlikely to be exciting as orders won under intense competition and lower margins in FY12 get executed.
| SLOWER PROFIT GROWTH | |||
| In Rs crore | FY11 | FY12E | FY13E |
| Sales | 43,905 | 52,439 | 63,578 |
| Y-o-Y chg (%) | 18.6 | 19.4 | 21.2 |
| Operating profit | 5,622 | 6,498 | 7,821 |
| Y-o-Y chg (%) | 16.7 | 15.6 | 20.4 |
| Adjusted net profit | 3,625 | 4,229 | 5,016 |
| Y-o-Y chg (%) | 14.5 | 16.6 | 18.6 |
| EPS (Rs) | 59.5 | 69.5 | 82.4 |
| Y-o-Y chg (%) | 14.5 | 16.8 | 18.6 |
| P/E (x) | 22.8 | 19.5 | 16.5 |
| Standalone numbers E: Estimates Source: Analysts Reports | |||
Consequently, their view has changed from optimistic to cautious on the stock, even as it currently trades at a reasonable 17 times FY13 average estimated earnings (a discount to the five-year average price to earnings ratio (P/E) of 23 times).
LOWER EXPECTATIONS
Order inflows grew a mere four per cent in the June quarter. Though the actual order intake in the current quarter will only be known at the time of result announcement next month, in the September quarter, the company has so far announced an order intake of roughly Rs 10,000 crore, according to information available on the exchanges (L&T reports only bigger orders).
Given the guidance of 15 per cent in order inflows, the company needs to bag fresh orders worth Rs 91,800 crore in FY12. Assuming it reports the same amount of orders in the September quarter as it did in the June quarter (Rs 16,190 crore), its order intake will have to grow by 36 per cent year-on-year (y-o-y) in the second half of FY12. Analysts say this looks tough in the current environment, which is unlikely to change for the next two quarters. So, they expect a revision in the company’s targets.
Says Ankur Sharma, analyst, MF Global, “We expect the company to scale down its order inflow growth guidance post the September 2011 quarter results, as it continues to see delays and deferrals in orders (domestic and international), and is unlikely to see a significant pick-up in the next two quarters.”
Adds Ashutosh Narkar, analyst, HSBC Global Research, “Against the current weak macro economic backdrop and given the slowdown in government policy and decision making, we expect L&T to water down its order inflow expectation to 12-13 per cent year-on-year growth during FY12. There is a marginal risk to order inflow guidance after L&T lost out on the recent NTPC bulk tender orders. This, along with delays in new orders from infrastructure sectors, could put pressure on new orders during FY12.”
Though the company is witnessing good traction in segments such as processes, hydrocarbons and railways, they are unlikely to compensate for the subdued activity and stiff competition in bigger segments like power and infrastructure (which accounted for 70 per cent and 68 per cent of 2010-11 order inflows and order book, respectively). With interest rates unlikely to turn benign in the second half of FY12 as was expected earlier, the scenario for order inflows remains challenging. Says Sharma, “Capex growth over FY11-13 is expected to slow down considerably.” Adds Amit Mahawar, analyst, Edelweiss Securities, “We have trimmed our order intake assumption by eight per cent and nine per cent for FY12 and FY13, respectively.”
In this backdrop, achieving 25 per cent growth in top line also looks difficult. In the June quarter, L&T’s revenues grew 20 per cent, helped by a lower base (revenues had risen by just 6.4 per cent in the June 2010 quarter). To achieve the FY12 target, revenues would need to grow by 26 per cent year-on-year during July 2011 to March 2012 (the remaining nine months of this financial year), which looks a bit difficult. Notably, margins are unlikely to fall significantly due to a stable commodity price outlook for the remaining part of FY12.
VALUATIONS, COMPETITION
Analysts have tweaked their one-year forward target multiple from 20 times to 18 times, partly due to increasing competition in each of L&T’s business segments. They say the company has recently lost a couple of orders in power equipment (it was expected to be the lowest bidder in NTPC’s bulk tender), transmission and distribution and oil and gas.
Says Sharma, “L&T has been increasingly looking toward the Middle East (ME) markets and plans to double its orders over the next three years but, since 2005, Korean E&C (engineering and construction) players have been aggressively targeting ME, partly due to slowdown in their domestic market and also to cash in on a large opportunity.” Adds Mahawar, “Intensified competition from foreign players (Chinese and Korean) in the past one or two years has played spoilsport both in India and in the Middle East.” In sum, the company is facing heat from all sides. While it remains a cost-efficient player across its businesses and is investing in newer areas (defence, shipbuilding and nuclear power) for long-term growth, the benefits would accrue only in the long term.
