Larsen and Toubro (L&T)’s Q4FY2009 results were ahead of our expectations on the back of a slightly stronger than expected top line and greater than expected margin in the engineering and construction (E&C) division.
The stand-alone top line saw a growth of 23.6% to Rs10,469 crore. The topline growth continued to be driven by the strong performance of the E&C division, which grew by an excellent 38.3% in the quarter.
The performance of the electrical & electronics (E&E) division remained subdued with its sales declining by 6.3% during the quarter. The machinery & industrial products (MIP) division reported a year-on-year (y-o-y) decline of 23.3% in sales in the same period.
Higher other income and interest cost led to a 29.9% growth in the adjusted profit to Rs1,142.4 crore.
After the extraordinary items (a Rs42.4-crore gain on the sale of the ready-mix concrete [RMC] business and a Rs186.28-crore provision pertaining to its investment in Satyam Computer Services [Satyam]), the company has reported a 3.3% growth to Rs998.5 crore.
The order inflow remained extremely impressive in FY2009, as the overall order inflow grew by 23% and the E&C order inflow grew by 28% during the year despite challenging times and a delay in some of the orders.
L&T ended FY2009 with an overall order backlog of Rs70,319 crore, which provides extremely strong visibility to its earnings.
Going forward, the management has reiterated its order inflow guidance of 25-35% for FY2010 over the last year, with continued buoyancy in the public sector orders. In the private space, strong inflows are expected from the fertiliser and power space.
Moreover, the hydrocarbon orders, which have seen significant delays so far, are also expected to be finalised soon.
In fact, orders worth Rs10,000 crore in the oil & gas space are expected to be finalised and awarded in the next six weeks, which could potentially provide a significant fillip to the company’s order inflows.
For FY2010 we are building in a conservative 14.8% growth in the order inflows which is quite below the company guidance.
We are currently fine-tuning our estimates for FY2010 in view of the better than expected performance in the fourth quarter and the availability of certain key balance sheet numbers.
We estimate the order inflows to grow at a compounded annual growth rate (CAGR) of 15.9% over FY2009-11.
We are also introducing our FY2011 estimates in this note, as we expect a revenue growth of 22.5% and a profit growth of 18.4% during the year. Our consolidated earnings per share (EPS) estimate for FY2010 stands at Rs78.2.
At the current market price, the stock is discounting its FY2011E earnings by 18x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 11.6x.
The stock has seen a sharp run-up in the recent times with the allaying of concerns relating to the acquisition of Satyam and the significant buoyancy seen in the infrastructure companies in the wake of the decisive victory of the United Progressive Alliance (UPA) in the general election.
In view of the improved sentiments; the strong visibility of L&T’s earnings on the back of an excellent order book position; the company’s gigantic stature in the industry; and its proven track record, we are raising the valuation multiple for the core business to 20x FY2011, valuing the standalone business at Rs1,254 per share and the subsidiaries at Rs268 per share.
Consequently, on the basis of our sum-of-the-parts (SOTP) valuation for the company, the fair value of the stock has been calculated at Rs1,522. We maintain our HOLD recommendation on the stock with a price target of Rs1,522.