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Last Updated : Nov 23, 2016 01:54 PM IST | Source: Moneycontrol.com

Investors rejoice L&T Q2 but note ban may delay order execution

Bank of America Merrill Lynch says that though it is difficult to quantify demonetisation scheme may lead to labour shortage for L&T and its sub-contractors, impact execution of luxury residential real-estate projects (6 percent of order book) and potentially delay compensation from NHAI for exemption of toll collection on NHAI projects.


Investors are busy buying shares of Larsen and Toubro post its September quarter results but few analysts are worried that demonetisation may cause a bit of trouble for the infrastructure company. Shares of L&T rose 4 percent intraday on Wednesday.

Analysts feel that L&T may face delay in order execution especially in high-end realty space due to demonetisation as the country is grappling with cash shortage after PM Narendra Modi banned notes in Rs 500 and Rs 1000 denomination from November 8. However, its exposure to the high-end realty space is only 6 percent of the order book.


Bank of America Merrill Lynch says that though it is difficult to quantify demonetisation scheme may lead to labour shortage for L&T and its sub-contractors, impact execution of luxury residential real-estate projects (6 percent of order book) and potentially delay compensation from NHAI for exemption of toll collection on NHAI projects. However, it adds that L&T is trying to avert the
situation by addressing potential cash flow stress of its sub-contractors and vendors.


Reiterating neutral rating, the brokerage firm believes L&T is likely to witness an improvement in order flow growth, execution, margins and working capital cycle within India. It is also optimistic about L&T's visible efforts to improve its return on assets (RoE) through asset sales.

“We continue to expect risks from its business from Middle East. We raise our FY17/18 earnings per share (EPS) by 18/19 percent on below the EBITDA-line adjustments to reflect new accounting norms,” it says. BoAML has cut target price to Rs 1446 to reflect risks in its Middle East projects and potential near term disruption from the demonetisation scheme.

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Citi says that demonetisation may impact execution over short term. It says L&T deals in cheque payments but subcontractors do pay labourers in cash. "This may impede execution in Q3 but should stabilise thereafter. Labour availability has been impacted, but the company is countering the same. For instance, the company is
providing food to labor at construction sites. Toll collection in L&T IDPL’s road projects will be impacted temporarily. L&T will support its vendors to tide over the
issues related to demonetisation," it says in a note.


However, it is overweight on L&T with revised target price of Rs 1608 per share.


Though Deutsche Bank has a hold rating with target price of Rs 1380 per share, it says faster-/slower-than-expected apex cycle recovery remains the key upside/downside risk.


The management has acknowledged if needed it will re-evaluate guidance after Q3.


L&T has maintained its order inflow guidance of 15 percent and revenue growth forecast of 12-15 percent for the current financial year 2016-17. Consolidated order inflow increased 11 percent year-on-year to Rs 31,119 crore during the quarter, including international orders of Rs 7,386 crore," L&T said in its filing.

On a cumulative basis, order inflow for the half-year ended September 2016 stood at Rs 60,821 crore. Major orders were secured by its infrastructure and hydrocarbon segments. With this, consolidated order book of the group stood at Rs 2.51 lakh crore, higher by 4 percent on year-on-year basis. International order book constituted 29 percent of the total order book, the company said.


JP Morgan, meanwhile, reiterates overweight on the stock with a target price of Rs 1655 per share.


CLSA has a buy rating with a believe that it offers a good proxy to domestic capex, which ispicking up, and the company has a credible strategy to improve growth and return on equity (ROE). "We like L&T’s strategy to focus on the B/S vs chasing P&L growth in this liquidity constrained environment. This was amply reflected in the company reducing its working capital to 22 percent in Q2 versus 24% in FY16 and a peak of 26 percent, lower debtor days and curtailment of execution at sites, where payment risk existed," it adds.


At 13:25 hrs Larsen and Toubro was quoting at Rs 1370.10, up Rs 40.90, or 3.08 percent.

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First Published on Nov 23, 2016 10:57 am
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