In an interview to CNBC-TV18, Vikram Suryavanshi, research analyst, Antique Stock Broking, gives his views on Larsen and Toubro's (L&T) Q3 results.
Suryavanshi is optimistic on the company and says the company's order inflow is a positive surprise. "The order inflow which has come to USD 195 billion in this quarter is a positive. Despite concern for the order, positive inflow was also a concern as almost 53 percent has come from infrastructure engineering and Construction (E&C) where there could be margin dilutive orders," he says.
Suryavanshi is bullish on the company's overall performance and says he expects the company to maintain about 10-11 percent margins in the entire FY13. He adds, "In the fourth quarter itself, margins have had a variation from 13 percent to 15 percent. So, if you look at full year basis, I think about 10-11 percent is a reasonable margin which they are most likely to maintain."
Below is the edited transcript of Suryavanshi's interview to CNBC-TV18.
Q: How have you read the order book of Larsen and Toubro (L&T)? The management had its say on the fact that some people have walked out of the road orders but nevertheless, is that reason enough for you to up your price target or your view on the stock?
A: There has been a positive surprise from order inflow which has come to USD 195 billion in this quarter. Despite concern for the order, positive inflow was also a concern as almost 53 percent has come from infrastructure engineering and Construction (E&C) where there could be margin dilutive orders. However, the management has categorically clarified that these orders are not urgent dilutive and we see that a margin will remain in a reasonable range. So, there is no structural change happening in margin because the order flow is very strong that is a very comforting point.
If you look at full year, they have given guidance of 15-20 percent growth. We were expecting around Rs 81,000 crore of orders for full year and they have done Rs 60,000 crore orders for nine months and already guided for Rs 20-25000 crore order inflow in Q4.
So, they are in-line to achieve the guidance they have given. About Rs 5000 crore plus-minus won't make that much of a difference for the company and there is enough margin even if these orders get cancelled. Overall order book is Rs 1.6 trillion which gives almost 2.7 times of revenue visibility that is also very comforting.
Q: The big talking point on the negative side has been margins and the E&C segment seems to have shown the maximum pressure. In terms of going forward what sort of margins do you think are sustainable for L&T despite order execution being robust for the company?
A: This quarter margins are not as expected, but for a company like L&T who is executing large projects simultaneously, we have seen huge variation on quarter to quarter basis. That is not the right way to look at margins.
In the fourth quarter itself, margins have had a variation from 13 percent to 15 percent. So, if you look at full year basis, I think about 10-11 percent is a reasonable margin which they are most likely to maintain. Even the management is confirming that these orders particularly from infrastructure are not margin dilutive. Even lower margins are still within the variation that we have seen in the earlier quarterly results. So, I am not surprised by that number and I won’t read much into that variation. We are confident that they will have healthy margins.
In case of other competitors, the margins have become substantial erosion. However, the kind of economy we are having or even with the sluggishness in economy the current margins look very healthy for a company like L&T.
Q: What is the EPS forecast? What is the valuation and the price target?
A: We are expecting almost Rs 75-76 EPS on standalone basis and consolidated around Rs 83 for this year. Next year, we are looking at around Rs 90 on standalone basis and about Rs 100 on consolidated basis. We have not seen much profit coming from subsidiaries which we expect to come up next year to almost Rs 500-600 crore. That should be the additional driver for the consolidated earnings. L&T has around 18 times of standalone earnings, its core return ratios are still 20-24 percent for standalone return ratio and on subsidiaries, we have valued around Rs 408. So, my target price is Rs 1908 with a buy rating.