L&T soured market sentiment on Monday with a dismal April-June quarter earnings. The stock crashed around 7.5 percent on the BSE as its first quarter net profit fell higher-than-expected 12.5 percent year-on-year to Rs 756 crore.
Net sales increased lower-than-expected 5 percent to Rs 12,555 crore in June quarter from Rs 11,955 crore Y-o-Y. EBITDA margins shrunk to 8.5 percent from 9.1 percent Y-o-Y as big ticket orders were hard to come by.
So, how to trade the L&T now?
Target: Rs 1198
Rationale: Order inflows continue to surprise positively. FY14-15E EPS adjusted downward by 32 percent.
Rationale: Macquarie feels that the street will continue to debate achievability of revenue guidance which would keep stock range bound. It further adds that the entire dip in margin is due to negative operating leverage, as fixed costs increased 100bps in Q1 on YoY basis. Macquarie is optimistic over the longer term due to sharp order inflow growth and stable under-lying margins. “The tock could bottom at Rs 800 assuming 10% revenue growth for FY14,” it says.
Bank of America Merrill Lynch
Target: Reduced to Rs 1100 as Q1 margins disappointed.
Rationale: L&T offers the best proxy on capex recovery.
Target: Reduced FY14 target price by 5 percent to Rs 1,040 per share.
Rationale: It says that June quarter disappointed on both execution and margin performance. "Capacity underutilization, due to a weak top line, significantly higher contribution from overseas sales affected margin performance. However, it is premature to write off FY14 yet. Export revenue growth to taper down to 22 percent and domestic revenue growth to pick up to 14 percent in FY14," the brokerage explains.
Target: Reduced to Rs 993 as earnings per share (EPS) estimates down 5-11 percent for F14-15e.
Rationale: Execution has emerged as an even bigger challenge while 8 percent Y-o-Y decline in domestic revenues is the worst performance in over 20 quarters. Due to slower-than-expected execution and higher-than-expected margin decline, the brokerage has cut F14 and 15 EPS estimates by 5-11 percent.
Rating: Maintain Buy
Target Price: Rs 1056
Ratioanle: Execution pressure is visible in the results. Higher proportion of overseas revenue and negative operating leverage due to under utilisation of resources has impacted margins. Benign raw material prices is likely to support margins, especially in overseas contracts. Goldman Sachs has cut FY14-16E EPS by 6 percent on lower growth from power segment and lower margins.
Target: Rs 1007
Rationale: More worried about FY15 given management plans to increase international inflows from 17 percent in FY13 to 24 percent in FY14. Citi assumes over 15 percent order inflow growth for FY14 vs management guidance of 20 percent.
Rating: Maintain Neutral
Target price: Rs 955
Rationale: L&T would require 21 percent Y-o-Y growth in domestic revenue over the rest of FY14 to achieve its sales target, which could be challenging. L&T has revised its optimistic beginning-of-the-year guidance downwards during the year. The brokerage sees heightened probability of L&T cutting its FY14 guidance, especially on margins and continues to build in a 94 bps margin decline for FY14.