Larsen & Toubro

Investors with a 2-3 year perspective can consider accumulating the stock of Larsen & Toubro on declines linked to broad markets.

While slower order execution over the first half of 2009-10 may moderate the current year’s revenue growth, 2010-11 could well be a year of high growth as bunched-up orders translate into sales.

Record order inflows, successful entry into the lucrative power segment and ability to tap attractive funding channels are key positives to the business, mitigating concerns of slowing growth. At the current market price of Rs 1,576, the stock trades at 19 times its estimated consolidated per share earnings for 2010-11.
Tepid growth

L&T’s revenue from its continuing businesses grew by a tepid 7 per cent for the September quarter over a year ago, raising concerns of slower order execution. The management has clarified that the slowdown was a result of delay in clearance for some of its infrastructure projects.

Besides, the changing mix of orders, with an increasing focus on power projects, may also mean longer execution cycles compared with infrastructure/civil projects.
Swift shift

L&T’s ability to quickly foresee the slowdown witnessed last year and shift its focus from projects focussed on private spending to those relying on public spending requires mention. Orders from the public sector, which accounted for 50 per cent of the company’s projects 2007-08, stood at 80 per cent in 2008-09. While government orders continue to be high, the September quarter order inflows suggest that private projects are once again taking centre-stage.

After setting a record in the September quarter, order inflows have gained further traction in the current quarter; order book is close to Rs 89,000 crore (2.2 times consolidated revenue for FY-09). While power projects would be the key driver of revenues over the next couple of years, increased contribution from the hydrocarbon space is also becoming evident in the company’s portfolio. This could mean superior profit margins. Operating profit margins expanded by 1 percentage point to 10.2 per cent in the September quarter over last year.

L&T’s electrical & electronics segment as well as the machinery and industrial products division have not so far shown much promise . An improvement on this front could further elevate profitability. Recently-issued FCCBs and institutional placement have fetched about Rs 2800 crore; keeping its leverage low, while at the same time ensuring funds for the power, port and forging facilities.

via BL