Larsen & Toubro reported a better than expected growth of 31.6% year-on-year in its adjusted profit after tax of Rs 1,920 crore for the fourth quarter of FY12. After including exceptional items of Rs 227 crore in Q4FY11, company's reported profit after tax rose 13.9% for the quarter ended March 2012.
In an interview to CNBC-TV18, Lokesh Garg, associate director of Kotak Institutional Equities says, L&T’s guidance on both revenues and order inflows sounds a little aggressive. “Our revenue growth guidance is close to about 15%. At a standalone level, we are looking at an EPS number of about Rs 74 for L&T next year,” he adds.
He has a positive rating on the stock. “Inspite of not having built in the full extent of guidance, even on those estimates, the stock trades reasonably cheap, about 11 times FY13 price to earnings,” he elaborates.
Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: What did you takeaway from the guidance?
A: L&T’s guidance on both revenues and order inflows of 15% to 20% growth with flat margins, in my view, in this environment sounds a little aggressive. If you were to ask our estimates, at this point of time, we don’t build in these kind guidance numbers.
Our revenue growth guidance is close to about 15%, but order inflows we are broadly building a flat number right now. In terms of margins, we are actually building about 60-70 basis points incremental decline post whatever has happened in FY12.
The point that we are making to investors at this point of time is that inspite of not having built in the full extent of guidance, even on those estimates, in our view, stock trades reasonably cheap, about 11 times FY13 price to earnings. That is why we have a positive rating on the stock, ‘add’ rating.
Q: If your target for FY13 is that they will grow revenues by 15%, what kind of earning per share (EPS) numbers are you looking at for L&T next year?
A: At a standalone level, we are looking at an EPS number of about Rs 74 for L&T next year. They will grow their revenues by 15% in conceptualisation, EBITDA by about 10%. The growth at EBITDA tends to get diluted as they come down towards PBT and PAT because of slightly lower other income, slightly higher taxation versus this year that we have built in. Our estimates builds in a reasonable amount of conservatism which is possibly justified based on the environment. To that extent, it is those estimates that stock seems to trade reasonably attractive.
Q: On Rs 74, at Rs 1,200, you are talking about 16 times one year forward, is that cheap in the current environment?
A: Yes. One has to look forward to the fact that L&T has sizeable investments in businesses which are apart from standalone. Those investments we value at Rs 400, book value of those investments in our judgment at the end of FY13 would be Rs 280; 1.3 times book is how we value them. You have to adjust the Larsen stock price by non-core business investments.
If you were to ask this question on consolidated earnings, our consolidated earnings is roughly Rs 85. On that, stock seems to trade at 13-13.5. Some of these non-core earnings have a characteristic. Basically non-core businesses are not earnings accretive as yet, but they are value accretive in the sense that these are infrastructure projects and would ramp up in revenue and earnings terms over a period of time.
Q: Did you hear enough from the management in terms of the delayed orders and the fact that execution would be smoother this year? That is the problem with last year. They put out a guidance and then from Q2 and then from Q3 onwards they really got hit by delays in projects, so it decelerated.
A: Actually on revenue growth, which is execution front, they seem to have done extremely well, considering the environment. They delivered more or less consistent revenue growth of 20% across quarters.
Where possibly they failed versus their guidance is essentially on order inflows. I think in part we saw what happened in the environment which is partly outside control of L&T management. Also, there were specific losses in project opportunity such as in bulk tender for NTPC boiler turbine units. They lost out on relatively small margins on price, small difference on price. That affected the fact that they were not able to achieve the guidance. Guidance to start with last year was also probably aggressive, given the context prevailing then. The context continued to weaken as the year progressed, which is what possibly let to their missing their number.
Q: Aside from L&T, numbers seems to be uniformly bad for the infrastructure capital good space. Is there anything else that you are coming through post earning season with a buy on or that you have the confidence to buy?
A: In our view, if you look at capex environment, at this point of time, several companies have reported 15-20% decline in order inflows or in revenue line depending on the execution cycle of the business. What we are seeing at this point of time is that from a bottom possibly in terms of business scenario in October-November, there has been a pick up which has happened. But that pick up is not enough to get the numbers on business on a YoY growth trajectory.
Second problem is pick-up is not strengthened on a sequential month on month basis. It is not necessary that April is a better month versus March which is better than February. That is not happening at this point of time. In that case, some amount of risk remains in capital goods.
Apart from L&T, there are atleast two more stocks on which we have ‘add’ rating at this point of time, essentially Crompton Greaves and Voltas. Calls on these stocks at this point of time is based more on valuations and their overall balance sheet and cash flow generation characteristics rather than on positive momentum in business at this point of time.