Larsen & Toubro Ltd (L&T) stock highlights to buy best shares buying and selling shares in India

New players, domestic as well as foreign, are mushrooming in almost all sectors that have traditionally given business to L&T (power, hydrocarbons and infrastructure - roads, metro and rail)." While L&T has started looking at the foreign market (15 per cent of order book) and aims to achieve 25-30 per cent of inflows, there are many competitors even there, amid subdued economic conditions.

Missing on order inflows, however, may be a blessing in disguise for margins, as it indicates the company is not compromising and undercutting to win orders. In the nine months to December 2011, L&T maintained its operating profit margin, which slipped only 83 basis points. As L&T executes the order backlog and pipelines start to dry, the company, too, may have to resort to price aggression.

In short, sales growth and margins are at risk. Analysts don’t expect an improvement in FY13-FY14 due to the absence of a revival in short-cycle orders (precursor to revival in the capex cycle), unresolved issues in core sectors (power, hydrocarbon and process, which form half of its order inflows) and good activity only in few segments (dedicated freight corridor, urban infrastructure and highways).

Some relief, but outlook cautious
Shares in L&T rose five per cent immediately after the announcement of the much-awaited succession plan on March 9.

However, given the stock’s recent performance and the unchanged macro environment, most analysts are wary of medium-term prospects.

On the whole, until the rate cut cycle reverses or economic outlook improves significantly, the upside at best looks limited, based on the average 12-month target price of Rs 1,400.

Larsen & Toubro Ltd (updated - 24 Jan 2012)
Larsen & Toubro (L&T) surprised the Street with its performance in the quarter to December, exceeding expectations, especially after the muted performance during the first half of the year. While on-track project execution drove the company’s sales by nearly 23% y-o-y, a healthy growth in treasury income and income earned as dividend from subsidiaries and associates boosted the company’s profit after tax by about similar percentage point’s y-o-y.

The company’s Q3 results succeeded in drawing attention on all fronts - revenues, profits and also healthy growth in order inflows. It was however the 28% y-o-y growth in order inflows that did surprise many, especially when the growth guidance of order inflows for the year was revised from 15% to 5% just last quarter.

The company reported an order inflow of nearly Rs 17,000 crore during the quarter, taking its total order wins during the nine months of the current fiscal to Rs 49,415 crore. Given its guidance for FY12, it needs to secure a total of about Rs 84,000-crore worth of orders during the year. The big question is whether L&T will succeed in securing nearly Rs 35,000 crore, or 41%, of its targeted order growth in Q4 alone? Going by past data, the fourth quarter is usually the best quarter in terms of performance for almost all companies in engineering and capital goods segments and L&T is no exception. The company has in the past generated nearly 30-38% of its order inflows in the fourth quarter. This time, however, macro-economic conditions are more challenging than in the past.

Another concern is declining operating margins. At 9.6%, the company’s EBITDA margins for the quarter have been lowest since the March 2010 quarter. The management has cited forex MTM provisioning as one of the reasons for the squeeze in EBITDA margins in the current quarter. However, the fact that margin have been on a declining spree for nearly eight quarters now do raise concerns of cost overruns and pricing pressures. The management has maintained its stance that a 75-125-bps dip in the EBITDA margins for the year could be a worst-case scenario.
Source - Economic Times

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Larsen & Toubro Ltd (updated - 14 April 2012)
The Larsen & Toubro (L&T) stock, which underperformed the broader market between July and December 2011, has delivered significantly higher returns (up 30 per cent) in 2012, compared to 11-13 per cent by the Sensex and Bharat Heavy Electricals Ltd. The gains are consequent to hopes that the higher interest rate cycle will reverse at some point in time, leading to better economic activity.

While valuations of around 16 times 2012-13 estimated earnings are not expensive. Though the interest rate cycle is expected to turn in 2012, most analysts haven’t turned bullish yet. They continue to give their short-term views on the stock, as competition (both in India and globally) has significantly changed L&T’s long-term outlook and the macro environment hasn’t changed for the better.

Missing target
Based on a five per cent order inflow growth guidance, L&T needs to report growth of 13 per cent (or Rs 34,383 crore) for the March quarter. However, it has so far announced Rs 12,593 crore worth of order intake. The balance, Rs 21,790 crore, looks difficult even after including the unannounced orders. Though the previous corresponding quarter gives a higher base (order inflow was up 27 per cent), the consensus estimate is that L&T is likely to report a decline of five per cent in order inflows in 2011-12.

Rising competition
Apart from high interest rates, land acquisition and environmental clearance issues have led to weakness in both public and private capex. L&T’s order inflow growth of 29 per cent in FY09-FY10 came down to 15 per cent in 2010-11 and was flat year-on-year in the nine months to December 2011. Amid a sluggish demand environment, competition has heightened in India since the past few years.