Does Antique Broking see L&T edging out over BHEL?

Abhineet Anand, Analyst at Antique Stock Broking speaks to CNBC-TV18 about the capital goods pocket, especially, L&T and BHEL.

Below is a verbatim transcript. For the complete interview watch the accompanying video. Q: L&T has been the big star today. What is your price target here? A: We have a price target of Rs 1,800 and we have a buy on the stock. A lot of people on the street had gone negative. Our view was that order inflows although they had not disclosed a number of them because of confidentiality with the customers. We had built in somewhere around Rs 30,000-33,000 crore of intake. The company delivered Rs 30,000 crore. The street was positively surprised on that number and also on the guidance for FY12. Hence, we have seen the movement in the stock in the last two days. Q: How do you treat that order book guidance on 15-20%, for some people the upper end is looking like a big ask, for some they are notching it up to 23% expectation on order book? What is your order book expectation for FY12? A: The order book inflow for FY11 that has just passed, they missed it from 25% to 15%. One needs to consider two-three facts here; first being the way inflation has been high and the way interest rates have been high. Construction activities, projects, all these get delayed by the rising interest rate and high inflation. Also the fact that we had five elections recently, each time elections happen there is a slowdown in a specific state. Even private investments go on a slowdown because clearances are needed from the state. You have to look into the numbers of order inflow growth for FY11 considering these facts. When we move to FY12, a lot of orders which got stuck last year might get into the second half of FY12. That is where even the management is looking for some growth in this year. We just add on FY10 numbers at 25% growth, you will come somewhere around 90,000 which is the same as FY12. So maybe 20% is on the higher side but we have factored in 14-15% order inflow growth. Q: How do you map that softer and non-quantifiable issue of execution? There have been quite a few slips through FY11 on execution and many of the projects that the management talked about yesterday are pretty long gestation which go into three-four years? A: You are right when you say that the order book of L&T which used to generally have a gestation period of 24-26 months has moved up. That is primarily because of large power orders that have come which will have an order execution of closer to 45 odd months. Power today constitutes 32% of the order book. In power, more than 50% is for boiler, turbine and generator (BTG) space, which takes a larger amount of time maybe 48 months while BOP takes 30. So there is an elongation. Hence, you would see that the order book to sales for the company has moved to 3x. Although, there is a 3x number, still the revenue growth guidance given by the company is 25%. Many people along with us believe that 20% looks like an achievable number. So even though there is a 3x, a 20% increase is only being factored in otherwise the growth would have been higher. Q: All through FY11 a lot of people made that switch from L&T into BHEL. Does L&T now become your preferred pick for this year? A: We like both the companies and the reason is twofold. These are two largecaps in the capital goods space and people prefer one over the other depending upon the type of sector that is being preferred. Our view is that BHEL is into a value zone presently, trading around 14-15x which to our understanding, the 2008 down cycle was the bottom of the PE multiple. For L&T, although, the multiple numbers are higher than BHEL, it must be trading at 17-18x in terms of standalone numbers, the diversification and other aspects in the company in terms of execution scale is slightly better in L&T. The other fact is because BHEL is only focused on power or say 80-85% while L&T at 30-35%. So if hydrocarbon and process industries pickup this year, L&T has an edge over BHEL. The reason why we pick L&T is for the diversification case and for BHEL is because it