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Larsen & Toubro Ltd (updated - 02 June 2009)
With signs of a recovery in the Indian economy, one would have expected engineering major Larsen and Toubro’s outlook on sales to be a little brighter than the 15-20 per cent number that it has indicated. Also, while orders are expected to come in higher by about 25-35 per cent, not a bad number in itself, the mood at the Rs 33,646 crore firm doesn’t really seem that upbeat.

The order backlog at the end of March was a little over Rs 70,000 crore. In all fairness, the company is probably waiting for the new government to move ahead on infrastructure projects and isn’t willing to bet on a quick revival in capital spends by the private sector. Also, a few orders are likely to be delayed and some of the assignments are of a long-term nature.

But since the March 2009 quarter numbers beat expectations, the Street was probably looking for more. L&T managed to leverage the strong 24 per cent rise in revenues to post fairly strong operating margins at 13.9 per cent, up 70 basis points year-on-year. With a little help from other income, the pre-exceptional net profit was up a good 30 per cent. In the current year, the company is expected to turn in revenues of close to Rs 40,400 crore and a net profit of around Rs 3,100 crore.

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Larsen & Toubro Ltd
The L&T stock has been derated in recent months mainly, it would appear, because it acquired a 12 per cent stake in Satyam Computer Services and ostensibly plans to bid for the technology firm. Early last week the stock hit Rs 562, a two and a half year low and even now it trades at around 610 levels, having lost close to 60 per cent of its value over the past year compared with about 41 per cent for the Sensex.
But the bigger worry now seems to be a loss of momentum in order inflows; L&T had indicated that orders would increase by about 30 per cent in the current year; that target may be missed because of a delay on the part of ONGC in awarding contracts.
Besides, a small part of the current order book, which is a robust Rs 69,000 crore, could see delays of between 8-10 months either because clients are still to mobilise the resources or are waiting for some more clarity on demand. While the ONGC order may come through next year, given that cash flows of most companies are strained, L&T’s order book may not grow as fast in 2009-10 say industry watchers.

As such, revenues are expected to grow by about 23-25 per cent next year on the back of an increase in the top line of close to 35 per cent this year. With operating margins expected to come off slightly, the growth in the parent’s net profit in 2009-10 is now estimated to grow by sub-10 per cent compared with a rise of around 30 per cent this year. Although L&T has spent around Rs 600 crore for the Satyam stake, there are those who feel it might be better if the firm didn’t win the bid due to the various risks associated with the acquisition.
source - BS

Larsen & Toubro Ltd (updated - 14 April 2009)
The Street appears to be quite relieved that Larsen and Toubro (L&T) hasn’t won the bid for Satyam Computer Services. The L&T stock, which fell by over 5 per cent in intraday trades on Monday bounced back towards the end of the session though it was still in the red. The stock has been badly derated since the engineering major made it clear that it was a contender for Satyam, picking up a 12 per cent stake in the tech firm. Had L&T won control at th winning bid of Rs 58 per share, the stock may have lost further ground.

As it stands, not too much damage has been done. It’s apity L&T can’t surrender the shares which it acquired at an average of Rs 80 per share, at the open offer price of Rs 58. It may have lost around Rs 180 crore — that’s about a 5 per cent fall on an estimated earnings per share of Rs 63 for 2009-10. But, it would have freed up close to Rs 500 crore of cash and could have moved on. Now, it’s stuck with the stake and the mark to market loss would be around Rs 270 crore. However, the company has been winning orders of late and even the slightest signs of revival in the economy will see the stock being re-rated. At Rs 824, L&T trades a priceearnings multiple of 13 times(without m-t-m losses) which is not too expensive.
source - BS

The company’s earnings should grow at 20 per cent in each of the next two years since it is in a good position to cash in on the imminent economic recovery.
Moreover, its forays into railways, power equipment and shipbuilding too should pay off and make it a good diversified play on India’s improving infrastructure. However, the stock has rallied sharply in the last three months, outperforming the benchmark indices. At the current price of Rs 1,398, it trades at around 27 times estimated 2009-10 earnings and is somewhat expensive.
source - BS

Larsen & Toubro Ltd (updated - 17 July 2009)
With decisions on some contracts deferred, order inflows for engineering major Larsen and Toubro were lower by about 20 per cent year-onyear to Rs 9,600 crore in the June 2009 quarter.

The Street is somewhat concerned about order flows and the guidance for the current year; an increase of just 25 per cent, analysts point out, doesn’t suggest any major upturn in business.

That’s one of the reasons why the L&T stock fell nearly 4 per cent today to close at Rs 1,378. The current order book of close to Rs 72,000 crore is fairly robust and it’s possible that the company could win a couple of big orders from ONGC later in the year. Meanwhile, net sales for the June quarter were up just 11 per cent to Rs 7,363 crore. The management says revenues for the year should grow 15-20 per cent. The growth could be back-ended with a pick-up in the second half of the year.

Also, an operating profit margin of 10.7 per cent was a tad disappointing and lower sequentially. This was despite the fact that manufacturing, construction and operating expenses as a share of net revenues were lower by about 200 basis points on the back of lower raw material costs. Interest expenses were up just 15 per cent and hurt the profit before exceptionals. For 2009-10, the operating margin is expected to be in the region of 11 per cent.

At Rs 1,378, the stock trades at a price to earnings multiple of around 23 times estimated 2009-10 earnings, which makes it somewhat expensive given that earnings will probably grow just about 20 per cent this year.

The stock could remain at these levels until the management improves the revenue guidance or there are clear indications that orders are picking up.
source - BS

Larsen & Toubro Ltd (updated - 12 Aug 2009)
L&T continues to show its dominance in the Indian capital goods sector, with the award of two contracts worth Rs 5,300 crore from ONGC, and two smaller orders for coal handling plants together worth Rs 853 crore in the week gone by. ONGC’s order is for the erection of a process platform in the Mumbai High oil fields and supply of three gas compression modules. The other relates to an order from the UP generation utility for a coal handling plant worth Rs 364 crore, awarded in the quarter just gone by and a similar order from Neyveli Lignite worth Rs 489 crore.

The company had an unexecuted order book of over Rs 70,000 crore at the end of Q1FY10, which was 23% more than a year ago. The value of these contracts received last week is nearly 60% of the total orders received during the June quarter.

The ONGC contracts seem to have become a routine affair for the company, which has completed 20-odd similar projects so far, and is presently executing some others. The company also seems to gain some operating advantage, as most of its competitors in this field are international. However, the other order is interesting where there are enough players engaged in providing balance of plant (BOP) for power plants. Managing these relatively smaller projects amongst high-value projects, reinforces the ability of L&T to take care of all the segments of its diverse portfolio.

These recently won projects are to be completed in a schedule of 31-33 months. Assuming uniform revenue booking for the projects during this period, and assuming the average net profit margin at a three-year average, its current EPS of Rs 52 could go up annually by Rs 3.1, which is quite significant.

L&T’s performance on the stock exchange, however, has been somewhat inconsistent. On both the days these contracts were announced, the stock underperformed the benchmark Sensex. However, this may be because the company has already outperformed the Sensex since March ‘09 and these orders have limited impact on the expectations already builtup in the stock price.
source - ET

Larsen & Toubro Ltd (updated - 18 Sept 2009)
The Larsen and Toubro (L&T) stock has had a strong run gaining 142 per cent since April this year compared with 68 per cent rise in the Sensex. That’s not surprising as order inflows have been fairly strong for the engineering and construction (E&C) major — in the last couple of months orders worth more than Rs 11,000 crore have been announced with wins from both the public and private sectors.

Bulk orders seem to be flowing in from the oil and gas, power and roads sectors and given the government’s renewed thrust on infrastructure the momentum should sustain. As such, new orders are likely to increase by about 20 per cent in the current year over 2008-09.

Order inflows in the June 2009 quarter, at Rs 9,570 crore, were down 22 per cent year-on-year and adjusted for captive orders, the fall was even sharper. Nevertheless, the order backlog at the end of the quarter was close to Rs 72,000 crore, up 23 per cent year-on-year.

For all this, the growth in revenues this year could be a subdued 16-17 per cent; the increase gross sales, at just 6 per cent in the June 2009 quarter, to Rs 7,430 crore was disappointing. However, operating margins expanded 115 basis points, driven by the E&C business and also by the fact that several projects reached the threshold after which profits are recognised.

With the new business expected to be fairly profitable at 10-11 per cent, analysts estimate L&T’s margins could sustain for a year or so though competitive pressures could pressure margins thereafter. As such earnings are expected to grow by a compounded 18-20 per cent between 2009-2011.

The stock is a good play on India’s infrastructure growth and the upswing in the capital expenditure cycle since it has an exposure to a whole host of high growth segments including power and hydrocarbons.
At the current price of Rs 1,644, however, the stock trades at close to 21.5 times 2010-11 estimated earnings and at afairly steep premium to the market.
source - BS

Larsen & Toubro Ltd (updated - 09 Oct 2009)
Larsen and Toubro (L&T) has managed to mop up money from the capital market at an attractive price, so a dilution in the company’s equity base should not matter. The $400 million qualified institutional placement (QIP) has been priced at Rs1,660, a good price to have picked up equity. With interest rates expected to move up, albeit gradually, the QIP together with FCCB issue for an amount of $200 million will come in handy.

After a lull in the March quarter, orders have picked up and the engineering and construction (E&C) major has seen orders worth Rs 11,000 crore flow in during the past few months, with wins from both the public and private sectors. The bulk of the orders seem to be flowing in from the oil and gas, power and road sectors and given the government’s focus on infrastructure, there should be more to come.

As such, new orders are likely to increase about 20 per cent in the current year over 2008-09. Order inflows in the June 2009 quarter, at Rs 9,570 crore, were down 22 per cent year-on-year and adjusted for captive orders, the fall was even sharper.

Nevertheless, the order backlog at the end of the quarter was close to Rs 72,000 crore, up 23 per cent year-on-year. For the September 2009 quarter, L&T should post revenues in the region of Rs 9,000 crore, a year-on-year increase of 17 per cent. The increase in the operating and net profits can be even better at 19-20 per cent. Should these numbers materialise, the growth in revenues for 2009-10 should be higher by about 18 per cent, though the 6 per cent increase in gross sales in the June 2009 quarter to Rs 7,430 crore was disappointing.

Profits too could surprise on the upside and average a compounded 18-20 per cent in 2009-2011. L&T is the best play on India’s infrastructure growth and the turnaround in the capital expenditure cycle. Though at Rs 1650, the stock trades at close to 21.5 times the 2010-11 estimated earnings and is not cheap.
source - BS

Larsen & Toubro Ltd (updated - 23 Oct 2009)
Larsen & Toubro’s (L&T) September 2009 quarter performance was a mixed bag and short of expectations. The stock was down 3.9 per cent, much more than the 1.3 per cent decline in the Sensex. Revenues grew by a mere 3 per cent to Rs 7,919 crore, lower than Rs 8,300-8,900 crore estimated by analysts. But, adjusting for the sale of its ready-mix concrete business, revenues were up 6per cent.

While net profits (excluding exceptional items of Rs 12 crore) were up 24 per cent at Rs 568 crore and within estimated range of Rs 550-630 crore, it was boosted by a strong 64 per cent rise in other income at Rs 218 crore. Higher treasury, interest and dividend income and Rs 86 crore worth of export incentive arrears boosted other income. In the core businesses, subdued demand in the global and domestic markets impacted the performance of its electrical & electronics (E&E) and machinery & industrial products businesses leading to lower revenues year-on-year.

However, since the last two quarters of 2008-09 were not good, these businesses should see better numbers in the second half of the current fiscal.

The biggest revenue contributor, the engineering and construction division (E&C) benefited from strong growth in export revenues (up 32 per cent), helped by relatively higher order inflows last year. But, with delay in project awarding in the domestic business last year, revenues were up just 7 per cent. Positively, lower commodity prices and better product mix in E&E business boosted EBIDTA margins by 400 basis points year-onyear to 17.1 per cent -overall EBIDTA margins were hence, higher by 140 basis points to 10.6 per cent (more than estimates of 9.610.4 per cent).

L&T secured some big projects in the hydrocarbon and power sectors during the quarter, pushing up its new order inflow by 47 per cent year-on-year to Rs 18,365 crore ---almost double the orders received in the June quarter. Thus, its order book rose by 30 per cent to Rs 81,623 crore, which is 2.3 times L&T’s previous 12 months revenues and indicates healthy visibility. With the Indian economy showing signs of improvement, spending on infrastructure to remain healthy and firm crude oil prices, the company’s management believes that the outlook is better -- order book growth likely to sustain at 30 per cent, margins to hold at current levels and revenue seen growing by about 15 per cent. At Rs 1,608.50 though, the stock trades at a PE 25 times its estimated 2009-10 EPS and looks fairly valued.