L&T's revision in inflow guidance no shocker, say experts

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For second quarter FY12, the engineering major Larsen & Toubro 's (L&T's) net profit was up 15% at Rs 798 crore against Rs 694 crore in the same quarter last year and the gross sales were up 20% at Rs 11,375 crore YoY. Moreover, the company revised its FY12 order inflow guidance to 5% from 15% earlier.

While Shailesh Kanani, senior research analyst of Angel Broking feels the company has had decent order inflow, Lokesh Garg of Kotak Institutional Equities elucidates L&T's order inflow guidance revision was expected.

Kanini indicated that the second half of FY12 would be crucial for the company as the scenario is not picking up. However, Garg clarified that Kotak Institutional Equities reduced L&T's rating from February FY11 or so.

Here is the edited transcript of his interview. Also watch the accompanying videos.

Q: How alarmed would you be at this big scale down in order inflow guidance? How would you rework your numbers?

Garg: The order inflow guidance being downgraded is not a surprise at all. We didn't expect L&T to meet its guidance from the beginning of the year. This guidance downgrade does not surprise us or the market.

Q: Would you need to bring down the forward looking FY13-FY14 expectations?

Garg: We might have to bring down the expectation to some extent. Some expectations would have to come down on earnings. It would not be a dramatic change considering that this guidance downgrade was expected in the market place.

Q: What has your rating been on L&T? What is the price target?

Garg: Right now, our rating on L&T has reduced. We placed it in the month of February FY11 or so.

Q: In terms of price target, where are you currently? With respect to valuations, are those days gone when L&T enjoyed the band of about 17-25 times that it had? Should one forget those historic valuations?

Garg: Our target price is Rs 1600 right now, but it will undergo a change based on the change in numbers. The valuations would have trended lower. The valuation band on the standalone earnings of the company seems difficult to come back in the near-term or next three or nine months.

Q: The infrastructure companies like L&T and HCC management has shown worries with respect to orders and execution. What is your take on the sector? How some of these stocks would move from here?

Garg: One need to stay a little cautious on this sector because the cycle still remains weak. Some stocks might offer price opportunities, but ultimately these are cyclical stocks. As long as the cycle remains weak, serious performance won't come in.

Q: What is the lowest in your memory that L&T has gone down in terms of valuation multiples in the midst of fairly deep down cycles in investments?

Garg: A bottom was formed in March 2009. At that time, Larsen was broadly trading at standalone earning multiple of 10 times along with some valuation for its subsidiaries.

Q: What is your view on L&T's margins and order inflow?

Kanani: They have had decent order inflow. Considering the macro environment, the order inflow seems decent around Rs 17,500 crore. It would be important to watch out for the outlook going ahead in the second half as the scenario is not picking up. The numbers seem decent, but the topline is around 5% above their estimate. Similar is the case with PAT, which is above our and street expectations.

Q: Is it a worry that there has been considerable piling up of cost consumption of raw material? The employee costs are up by about 30% despite that, the margins quarter on quarter have been shaved off by 10 bps. Does it mean that they are weathering the expenditure better?

Kanani: We expected a flattish margin this time around. The management now expects the margin to be under pressure by 50-70 bps on a YoY basis. The company had cited an order inflow guidance of 15-20%, which would come down.

Q: What would be your comment on the stock price right now?

Kanani: I am positive on L&T. An investor should have a largecap company like L&T in their portfolio. If there is improvement in the industrial capex, L&T would definitely do very well given its leadership position and presence across various sectors. The numbers still need to be seen. The sale of investments might impact the quality of earnings for this quarter.

Q: What would engineering and construction (E&C) do in terms of margins?

Kanani: The segments are pretty much inline. We expected machinery and industrial products (MIP) to be under pressure and around 15% growth in electrical and electronics (E&E).

We expected MIP to do a little better than what they have done, but the major chunk of revenues come from the E&C segment. If they do well on that segment, it would be pretty good.