The Street feels Bhel may be a better bet since most of its orders are likely to be executedp.
The Larsen and Toubro (L&T) stock hit a 52-week low on Tuesday closing at Rs 575. Concerns about the order book — a large portion of the orders are from private sector parties — as also the firm’s intention to pick up stake with Satyam have resulted in the stock losing 28 per cent since the start of the year. On the other hand, peer Bhel has given up just 3 per cent. Over a longer period of a year too, Bhel has outperformed L&T significantly. Currently, the market values L&T at a multiple of just 10.5 times estimated 2009-10 earnings while it discounts Bhel at a higher 13.5 times.
That’s because Bhel, with an order book of over Rs 1 lakh crore, close to 5 times the firm’s 2007-08 revenues is viewed to be in a better position — most of its orders are from government utilities and chances of cancellations are lower. In the December 2008 quarter, orders were up 48 per cent whereas for L&T orders rose just 12 per cent, the lowest growth in 11 quarters.
Nevertheless, L&T’s order book is a sizeable Rs 68,800 crore, around 2.6 times 2007-08 sales. That’s not the real issue though. Analysts are worried that some of the orders could remain unexecuted since close to 60 per cent of these are from private players, who may not have the financial wherewithal to complete projects given the shortage of liquidity.
L&T's sales growth did slow down a tad in the December quarter. Moreover, Macquarie Research believes inflows of orders could decline by 15-20 per cent in 2009-10. L&T recently bagged a Rs 1,250 crore from ONGC but there seems to be greater visibility for Bhel, which could win more assignments from the government.
In the past, both firms have posted strong numbers;the compounded sales for L&T and Bhel in the past three years have increased 26 and 27 per cent respectively while compounded net profits have risen 41 and 44 per cent. That could change next year and there’s a chance L&T may slow down. Analysts are looking at a net sales growth of between 22 and 24 per cent for L&T and a minimum of 26-27 per cent for Bhel.
