Larsen & Toubro :: Bear and bull case scenarios; Target: Rs2,100:: JPMorgan

L&T has underperformed the market by 15% last month and is down
to its  52-week  low. At  16x FY12E earnings (vs low  of  10.7x  - Feb-09
and high of 26x - Sep-09), we explore the bull and bear case scenarios.
Given our view that overseas orders could be a joker in the pack, we
think  market  concern  on  headline  order  flows  could  be  exaggerated.
However,  the  bear-case  is  that  multiples  might  converge  towards  its
regional peers, following the change in geographical mix of orders.
 Investors  are  most  concerned with L&T’s  order  flows  this  year. In
the  past  9  out  of  10  years,  L&T’s  relative  performance  has  shown
positive response to order flow growth. Mgt has been guiding to 15-20%
growth in orderflows for FY12 (i.e.Rs917-Rs957B). Recently, L&T lost
large  power  plant  equipment  orders  to  stiff  competition  from  Doosan
and BGR. L&T could have budgeted at least Rs50B wins from here, in
our  view. Besides this  prominent  order loss, there  have  been  anecdotal
instances  of  L&T  losing  orders  in  domestic  hydrocarbons,  metals  and
nuclear power construction over the past 6 months.
 Over  the  past  6  months,  amidst  rampant  fears  of  domestic  capex
disappointment,  a  renewed  thrust  for  export  order  wins  is
discernible. In Jun-q, overseas inflows rose sharply to 16% of total. The
Sep-q  marks  a  quantum  shift  in  the  proportion:  L&T  has  reported
Rs82bn of order inflows of which as much as Rs51B was from overseas.
 What is the stock pricing in? That is the 20Bn$ question. The Mkt cap to
order  flow  ratio  is  0.86x based  on  Rs917B  of  FY12E,  vs  the  last  2  year
average of 1.2x and previous trough of 0.54x (Feb-09). From  this, it appears
an 18-20% decline is already being priced in by the market. However, from
our  conversations  with  investors,  it  seems  a  decline  of  10%  is  widely
expected. Currently, we think the markets are getting more bearish on order
flows than needed,  given the M-E upside which might be bigger than most
believe. The devil’s advocate, of course, would say that the stock should be
de-rated on the back of this, and that remains a risk to our call.