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Order slowdown priced into L&T’s valuations

Order slowdown priced into L&T’s valuations
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First Published: Sun, Oct 09 2011. 10 01 PM IST

A pedestrian walks past the L&T headquarters in Mumbai. Photo: Bloomberg
A pedestrian walks past the L&T headquarters in Mumbai. Photo: Bloomberg
Updated: Sun, Oct 09 2011. 10 01 PM IST
Shares of Larsen and Toubro Ltd (L&T), India’s biggest engineering company, have lost steam in the last few months.
A pedestrian walks past the L&T headquarters in Mumbai. Photo: Bloomberg
Although, over the long-term horizon of five years, the stock has returned more than three times the Sensex, it is now an underperformer. It has failed investors in the last 52 weeks; while the Sensex lost about 20.1%, L&T fell 31.6%. A key reason is dwindling order inflows, which have dimmed the outlook for revenue and profit.
Equity research houses expect the company to miss its forecast of a 15% increase in orders during fiscal 2012 (FY12). A report by Motilal Oswal Securities Ltd says, “We project an order intake of Rs 844 billion (Rs 84,400 crore) for FY12, up 6%.” Likewise, Nomura Equity Research also highlights a cut in order inflow estimates to Rs 80,100 crore in FY12 from its earlier estimates of Rs 90,100 crore.
Also See | Losing Steam (PDF)
Concerns were triggered by the weak 4% year-on-year (y-o-y) growth in order inflows in the June quarter, which fulfilled barely 17% of the year’s targeted orders. Further, loss of bids, such as NTPC Ltd’s bulk order for the supercritical boiler-turbine-generators and a pipeline order of Oil and Natural Gas Corp. Ltd, accelerated downgrades in order inflows for the September quarter.
Rising interest rates have seen deferrals of private sector projects and a slowdown in roads and highways, water and irrigation and certainly in mega power projects.
The firm has not bagged a single supercritical power project in the last one year. Further, the West Asian region—a key zone for its overseas operations—has been quiet, too.
Low order accretion in the recent quarters will not affect near-term earnings, but it would have an effect on FY13 earnings growth. This explains the steady fall in the stock price, which is down 15% from its April level. L&T’s valuation has fallen from around 22 times its forward earnings a year ago to barely 13 times.
But what’s noteworthy is that its fundamental strengths—strong execution abilities, unparalleled cash flow in the industry, relatively low leverage and a huge order backlog of about Rs 1.36 trillion—make it one of the best bets on India’s infrastructure story.
In fact, the September quarter results are expected to see 20-22% growth in revenue—a similar y-o-y growth was seen in the June quarter. Higher costs being booked because of faster rate of project completion could, however, see a 75-100 basis points dip in operating margin. Analysts expect the firm to post the least y-o-y profit growth (of around 5% ) in the quarter. One basis point is one-hundredth of a percentage point.
That said, the management view is that the second half, which is traditionally better compared with the first, should improve momentum. Investor sentiment would be hit by the management view on order inflows going forward when it announces the quarterly results soon. In fact, the next two quarters would determine whether the underperformance of both the company and its stock is a temporary blip.
No doubt, the cut in FY13 earnings estimates is a negative. But this appears to limit a big downside in the stock as the concerns seem priced into valuations at the current market price of Rs 1,393.
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First Published: Sun, Oct 09 2011. 10 01 PM IST