Larsen and Toubro (L&T) will not likely achieve its targeted 30% order inflow growth in the current fiscal as large orders from ONGC have been pushed out to FY10. We project order inflow to the tune of 12% for FY09.
However, the miss is not entirely surprising as the company has made it clear that guidance is contingent on ONGC orders coming through in 4Q FY09. These orders have only been deferred and not cancelled.
We are projecting order inflow growth of 20% in FY10 on a lower base and ONGC orders. The inflow should be boosted by large contracts on road projects and in the power sector. The company has yet to guide for order inflow in FY10.
We still expect L&T to deliver 30%+ revenue growth in FY09. Even revenue growth for FY10 is expected to be strong (19%) on the back of strong order book (2x FY09E revenues).
Management is confident of maintaining margins in the near to medium term in the project business, which accounts for 80% of revenues. Margins in the product business should come under stress in the near future.
We have built a margin decline in FY10 to account for stress in the product business and a delay in revenue booking from higher-margin projects.
The company is not as aggressive as it was earlier in acquiring Satyam given the much higher investment required. It is also negotiating with private equity players for a joint bid.
We believe the market has already built into the share price the possibility of L&T acquiring Satyam along with a miss on order inflow guidance in FY09. The street also remains extremely pessimistic on margins and order inflow for FY10.
The possibility of all the negative factors playing out simultaneously in FY10 is remote. The stock is trading almost in line with trough valuations during the previous downturn in FY00–02.
In our view, L&T remains one of the best plays on the cyclical upturn in 2H FY10.