Larsen Toubro’s (L&T’s) Q3’09 net sales jumped 34.6% y-o-y, in line with our expectations; however, EBITDA margin disappointed with a 96 bps y-o-y fall.
We have revised our order inflow growth projection, considering the worsening economic growth prospects.
The RBI made a downward revision in the GDP growth estimate for FY09 from the earlier 7.5%–8% to 7% (IMF’s revision, 5.1% from 6.3% earlier).
In November 2008, the capital goods output declined for the first time since 2001, indicating a reduction in demand for capital goods.
Consequently, we now expect the company’s order inflow to grow by 22% in FY09 and then contract by 3% in FY10 vis-à-vis our earlier growth estimate of 26% and 10% for FY09 and FY10, respectively.
We have also cut our operating margin estimate, owing to a likely decrease in revenue contribution from the higher-margined Electricals & Electronics (E&E) and Machinery and Industrial (M&I) segments, due to the intensifying slowdown especially in the construction sector.
In addition, margins of these two segments will also be adversely affected, as the reducing sales volume will increase the fixed cost burden.
Thus, we have reduced our standalone EBITDA margin estimate by 240 bps to 9.0% for FY09 and by 370 bps to 8.9% for FY10.
The stock is currently trading at a forward FY09 P/E of 16x. Our fair value estimate of Rs603, based on the Sum-of-the-Parts (SOTP) methodology, reflects a potential downside of 5% from the current market price. In the short term, we don’t foresee any major positive triggers for the stock.
Our valuation does not factor the possibility of acquiring Satyam, as we don’t expect the Company to go ahead with the open offer unless Satyam is ring-fenced from its potential liabilities.
With the government ruling out Satyam’s capping of liabilities, at this point the acquisition looks difficult.
On the other hand, if L&T decides to sell its holding in Satyam, this can result in a mark-to-market loss of around Rs5 per share for the company (considering Satyam’s current stock price), thus reducing our fair value estimate further to Rs598.
We reiterate our SELL rating on the counter.