Larsen and Toubro (L&T) disappointed street with the third quarter profit falling 14.6 percent year-on-year to Rs 1,060 crore on standalone basis, dented by lower operating income, higher depreciation and interest costs. However, the profit was supported by other income of Rs 621.9 crore (up 43.7 percent Y-o-Y). In Q3FY14, the profit was boosted by an exceptional gain of Rs 104.4 crore.
Discussing the results, Sanjeev Zarbade, capital goods analyst at Kotak Securities, said L&T’s revenue was muted and below estimates. He sees a further downside to the stock price in near-term and recommends buy on dips.
Though the cut in order intake guidance came as a ‘mild surprise’, Kotak Securities expects its order inflows to improve on the back of positive macros. According to Zarbade, the company has seen good traction in infra division orders in Q3. Kotak is working with revenue growth of 15 percent for FY16E.
Below is the transcript of Sanjeev Zarbade’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: What would your call be on the target price of Larsen and Toubro (L&T) and how an investor should approach it now post the weak numbers? A: Yesterday’s numbers that we saw, at the revenue level they were muted in terms of growth and there was also some pressure on the various business divisions that the company has on the margin levels. So, the stock reaction was negative because the numbers were not exactly inline. What we are looking at the company is that from hereon there could be a bit of a downside to the stock but there are certain positives that are going in favour of the company in the sense that the macro economic situation is on an improving track. So, from hereon we could see more number of projects getting finalised. The gestation period from a drawing board to order placement will come down and that should lead to more order intake in the coming quarters. So, although these numbers were bit of a disappointment we are looking at a forward level wherein we are seeing things improving. Hence we are not very negative on the stock. Any declines from these levels, we would be buyers.
Latha: What are you factoring in by way of revenue orders or margins for FY16? A: If you look at the company’s current fiscal revenue growth, the company has guided for around 10-15 percent at the revenue level. We are ourselves building in around 9-10 percent growth at the revenue level. If you look at the order backlog, it is up 17 percent and a lot of the orders are from the infrastructure division wherein we have seen good traction. Even in this quarter, the infrastructure division grew at a good pace of around 20-22 percent and that traction will take the company’s revenue growth into higher trajectory in FY16. So, we are working with a revenue growth of 15 percent in FY16 and we are looking at a bit of margin improvement going into the next fiscal because we expect that the losses that the company suffered in its hydrocarbon divisions would taper off in the next fiscal. Hence that should give us a good traction at the bottomline level as well. So, we are working with earnings of Rs 60 in FY16.
Latha: Which quarter because quarter after quarter the disappointment keeps coming not just in L&T but in several stocks, is the inflection point first half, second half, when will we see an improvement in margins and improvement in revenue numbers? A: One thing one has to keep in mind is that when you look at capital goods companies, the current revenues and the current margins is a reflection of what the company’s margins or the orders that the company got sometime back. So, orders which were received let us say in 2013-2014, those are getting converted into revenues and during those years the market was very competitive. So, when we speak to the capital goods company we are getting an indication that the new orders that are coming, are coming at much improved margins. So, the earlier orders when the competitive intensity was much higher are now getting converted into revenues. So, that is why we are seeing a bit of a pressure on margins as well as on the cash flow wherein the working capital situation is also not very encouraging. However, going ahead with the fresh orders which are coming at improved margins and hopefully we expect that the liquidity crunch in the economy to improve or at least reduce.
Sonia: That hope has been there for so long, how can you justify such high valuations for a company that delivers pedestrian earnings, does not manage to its own guidance time after time and is just living on hope that the capex cycle will pickup? We have seen no signs of a pickup just yet, how do you justify such valuations for L&T? A: Capital goods valuations will be on the higher side during the earnings cycle which are at the bottom. Right now the earnings that we are seeing, the margins that we are seeing are something which are at the lower level if you look at the past four to five year trend. Going forward since we expect the margins to improve, the valuations would also reflect the kind of strong earnings growth that the company can throw up in the future. So, as I said the current margins are a reflection of the past orders, are not really reflective of what can come in the future. We are hopeful and also the order backlog which is up 20 percent that will also start throwing some good numbers in the coming quarters. So, from that point of view we are hopeful. If you look at the stage that we are, we are at the cusp of a capex cycle. So, at this point of time there is a possibility that cap goods valuations could be on the higher side. However, if the outlook is improving one need not have to worry much. The second thing is that if you look at the infrastructure space there are not many quality plays to invest in. L&T being the only one so probably it could continue to trade at a premium and deserve high valuations. Latha: Are you surprised by the guidance cut? A: To some extent yes because the order intake number that they announced for the Q3 of Rs 346 billion were a bit higher than what we were expecting. So, in our view they were very much inline to meet the 20 percent growth guidance. So, to that extent the cut in order intake guidance is a bit of a surprise. Though the company has said that they have orders horizon of Rs 1,70,000 crore which is a substantial improvement on a year-on-year basis, some of those orders will get materialised in this quarter. Hopefully they should be able to achieve their order guidance at the higher end that is the 20 percent range; that is what we are building in.
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