Heavy engineering major Larsen & Toubro (L&T) met its full-year order flow guidance of Rs 80,000-85,000 crore and won orders worth Rs 19,500 crore during the December quarter. "Considering L&T's E&C business, their machine industrial product division has performed very well," said SP Tulsian of sptulsian.com in an interview to CNBC-TV18.
Tulsian is disappointed on the margin front but the road ahead seems to be good for the company. "L&T always sees robust numbers in Q4. Little disappointment on their margin, but overall the future seems to be good and intact," added Tulsian.
Below is an edited transcript of Tulsian's interview on CNBC-TV18
Q: First a word on Larsen and Toubro (L&T) and what you made of the numbers?
A: The entire focus has shifted on the order inflow which is quite satisfactory. However, if you take a call on the Rs 19500 crore order, you need to subtract Rs 4000-4500 crore. I have not been able to understand the commentary of the management saying that order inflow can easily come in the road sector. Does it mean that if the cancellations will happen then only they will hunt for the orders? This is a bit confusing and maybe net basis should be taken as Rs 15000 order inflow only.
If I go by their E&C business, their machine industrial product division has performed very well. The EBIT has doubled over sequentially and that has made the EBITDA margin to move to about 9.6 percent. So, there are concerns and disappointment on the E&C business which is their core business contributing 90 percent to their topline where we have seen a fall of about 160 basis point sequentially. So, that is a cause of concern.
In case of few companies, we take a narrow focus, here in case of the order inflow, I am not saying that order inflow is not the basic criteria, that is very important but we need to see that link with the margin also. L&T has always been able to hold the margins in double digit in their E&C business because their electrical business has been contributing very low, machine and industrial product division has been contributing very low.
Electrical division is contributing less than Rs 1000 crore on a QoQ basis and machinery industrial product less than Rs 600 crore. I am disappointed on the margin front but the road ahead seems to be good for the company and Q4 always sees robust numbers coming in from the company. Overall, little disappointment on their margin but overall the future seems to be good and intact.
Q: Were you convinced with what the management of Housing Development and Infrastructure (HDIL)? What is the fate of the stock now?
A: If I go by yesterday’s statement, management said that they have sold about 5 billion shares and nothing is going to come in the market for selling. This morning about 5 million shares were already traded in first half an hour or one hour, some more selling has happened. Going by the quantum, 5 million shares which the management sold must have given them about Rs 50 crore. They sold the share for making part payment of a property which the company has acquired. Again there is little confusion and non-clarity on that front.
If you go by the business model HDIL on a ballpark figure have 1 crore square feet of transfer of development rights (TDR) and the TDR rate is ruling anywhere between Rs 2,800-3,000 crore. TDR are the most easily en-cashable things. It is like a certificate bought by other developers, so they could have very well sold the part of the TDR if they are holding TDR of Rs 3,000-3,500 crore.
I do not understand the need for the promoter to sell their 1 percent equity which implies that they have reduced or diluted their stake on the entire bunch of the properties held by the company. Things are not giving comfort. You cannot rely on the statements given by companies like HDIL, because as such you have very low faith in the corporate governance of all the real estate companies where the promoter or the executive director or chairman, take the decision.
You do not have comfort and even if you have that would have got reinforced if we would not have seen such volume today which will result into the delivery only at the end of the day, so not a comforting statement. If the share gets settled, one can say that the selling has stopped either by the promoter or by the lenders who have got the pledge of these shares.
Q: What is your view with regards to the fundamentals on IVRCL and what would you attribute this 20 percent fall to? Are there any rumours that you are hearing?
A: This fall came in the last 15 minutes of trade today. I do not think that one can take a fundamental call, because we have seen these pledged shares getting sold about a year back. The same thing has happened about six months back also in few stocks. Whenever you see the massive selling coming in on a delivery based basis there are no buyers.
If you see the buyers they are all technical traders or with a short-term view looking out to make money of about Rs 2-3, because they are low-priced stocks where the traders have a good fancy. So this has to do with the pledged shares having sold.
I do not think that you the corporate governance issue is something which you have referred to that the annual general meeting (AGM) proceedings, intimated by the company to the exchanges that may have resulted in such a fall. IF such things happening, the liquidations that we have seen in case of the pledged shares about 12-18 months back and if it resurfaces again, that will be very painful for all thee stocks where the promoter stakes are very high in the form of mortgaged one or the pledged one.
The matter does not end there with respect to the promoter holding or pledged, there are many pseudo promoter holdings which make operations in the market, shares are held for the beneficial ownership of the promoters. But they are held in a different name on which the financing transactions are happening and if they are not able to make commitment there then you see the liquidations coming in and valuations getting eroded. Many stocks like Parekh Aluminex, S Kumars, Glodyne Technoserve, Zylog Systems, had these things happening in the last couple of months.
Q: What do you make of the reports that an NHAI consultant was found murdered and he was working on the IVRCL project? Would you panic on those reports?
A: Definitely those reports are of much concern. However, looking at the pattern, the corrections which have happened whether it's IRB, Orbit Corporation, IVRCL, all the selling has come after 2 o'clock. The slide of 8-10 percent can only come when big chunks of the stocks have been sold on a delivery basis.
Obviously one doesn’t have the corresponding matching buyer standing there. Then the pressure comes on the counter. I am not disputing the report which has come in respect to the NHAI engineer, in fact similar allegations or similar kind of thing has happened in IRB. Since then the institutional investors start coming in and that is the reason we don’t see those stocks bouncing back. Case in points is like Opto Circuits and maybe S Kumars, Zylog, Parekh Aluminex, if once you have these financiers.
NHAIs or the institutions or the lenders having lent money to the non promoter category shares also are more or less driven by the promoters only in the Benami name. So, it is very difficult for those stocks to bounce back. So, I agree that those allegations may have played a role, but that cannot get spilled over to all other stocks.
In fact there are at least about 20-30 stocks, like Punj Lloyd, Orbit Corporation, etc. All of them have corrected. Thus, definitely some selling has come from the lenders or from the informed circle in the form of the pledged share having placed with them.
Q: Which would be your preferred pick between Hindustan Unilever (HUL) and Indian Tobacco Company (ITC)?
A: I will go with HUL because people have been taking a bullish call or positive call on ITC. I agree that the results have been really very good. However, one needs to cap the stock price beyond a point. One can’t expect ITC to move beyond Rs 300. It will really find it tough.
If some positive bias starts building up on the fast moving consumer goods (FMCG), which can make the ITC to move to Rs 310-315, in that situation definitely other FMCG also will move up. HUL, in that event, can move to a level of about Rs 500. So, relative more performance is to be seen from HUL than the ITC.