L&T results satisfying; Religare recommends buy on stock

Engineering and construction major Larsen & Toubro (L&T) reported a higher than expected net profit of 16% at Rs 864 crore. The company also posted healthy sales figures, up 26% Y-o-Y at Rs 11,955 crore.

Suhas Harinarayanan, Co-Head of Research, Religare Capital told CNBC-TV18, the overall numbers look pretty healthy and they are satisfied with it. According to him, the fall in margins could be attributed to the mark-to-mark losses which are not business related. The company's forex losses also contributed to the reduction in margins, added Harinarayanan.
L&T also reported a good order inflows in Q1 and Harinarayanan believes it was supported by FY12 spill over. However, he feels the lack of BOT orders will weigh on the company's inflows. Looking at its first quarter performance, Religare Capital recommends a buy on the stock with a target price of Rs 1600 per share. Here is the edited transcript of the interview on CNBC-TV18. Q: What did you take away, were you happy with the Larsen & Toubro (L&T) numbers?
A: Yes, I think the numbers itself crated a little bit of flutter initially because the reported margins came at about 9%, even your channel flashed it at 9%. But, once the company clarified on the reason behind the fall in margins, I think the stock recovered almost all its losses.
The number itself was healthy. The order inflows grew by 22%, very healthy numbers, sales execution was largely on talk and profits adjusting for this mark-to-mark losses was also in line. So we were happy with the overall numbers. Q: No argument with the margins, having taken a final look at it?
A: Not really. I think there is a bit of margin fall because if you adjust these mark-to-mark losses which are not business related, which is about Rs 160 crore, the margin fall was something that we were building in. There were even some business related forex losses which we hadn't considered.
Overall, given the general state of affairs and the fact that L&T generally reacts pretty strongly to order inflows and margins and since the margins were not thoroughly disappointing, I think it is a good set of numbers.
_PAGEBREAK_ Q: On the order inflow front, do you think it was largely on account of the order inflow which spilt over from Q4 or do you think this kind of pace of booking might continue through the next three quarters?
A: Frankly no one knows about what happens in the next three quarters. But very clearly there were some spillovers from last year's Q4. If you look at the full year number from the last fiscal, it actually degrew orders by almost 15%. A lot of the slippage came in Q4.
Even at that point in time, there was a guidance that some of the orders which got spilled over and could have probably booked it at the end of Q4. They clearly spill it over to Q1. There was clearly something which helps the company show such strong growth in orders. In terms of outlook for the next three quarters, I think a lot of it depends on overall macro business momentum.
If at all one were to sound a little cautious vis-à-vis their guidance, it could only be due to the fact that a lot of other companies including L&T have clearly said they are not going to bid for any BOT projects. If captive orders from BOT, from L&T's own development business or from the likes of GMR or some of the other companies do account for a reasonable 25-30% of that order inflows, all companies are going to go very slow on BOT.
There could be some worry but it is too early to talk about. Things could change materially in the next six months as well. Q: Given their fairly strong execution this quarter in terms of booking revenues, do you think the worst is over for the stock in terms of price?
A: The stock has done fairly well this year. The stock is up a lot and I think it has probably outperformed the broader index by almost 25%. The stock is up a lot this year and at this point it is at Rs 1,400 level. We have a price target of about Rs 1,600. We are effectively talking of 12-13% upside from current levels for the price to reach our target.
In fact the stock has done well this year. We would think at higher levels, at Rs 1,500 levels, if the market is also supportive and if the stock goes to about Rs 1,500 levels one should clearly look to take some money off the table rather than putting more money at those levels.