The current investment cycle slowdown has been led by internal factors, vs external factors in the
previous cycle, and hence recovery will likely be slow. The current price seems to factor in a
sluggish recovery and possible cut in guidance. Thus, we resume coverage with a Buy rating and
Rs1,575 target price.
Slowdown led by internal factors; recovery likely to be weak
The present investment cycle slowdown is led by cyclical (high interest rate) and structural issues
(fuel shortages, EC clearances, corruption, etc). We expect recovery to be slower than in the last
cycle (2008-2009) as the current slowdown has been led by internal factors, rather than external
factors as in the previous cycle.
Weak macro, award deferrals, increasing competition all weigh on order inflows
Our analysis of L&T’s potential order list (see table 5) suggests a lack of buoyancy due to macro
issues (power, process), award deferrals (roads, ports, metro, power) and/or greater competition
(from hydrocarbon, power segments). Any potential market share gains in infrastructure (factories
& buildings, roads) will not easily offset the slowdown in other segments. While L&T has won
Rs252bn in orders (announced) so far, it will have to win another Rs665bn to meet its 15% growth
guidance for FY12 (FY11 order inflow was Rs798bn), which looks difficult. We expect order inflow
to grow 2% /12%/11% in FY12/ FY13/FY14.
Medium-term margins at risk
L&T’s EBITDA margin rose from 6% in FY04 to 12.8% in FY11; a cyclical high led by operating
leverage and efficiency gains. The company has already guided for a 50-75bp yoy margin decline
in FY12. Given the weak macro outlook and increasing competition across segments, new order
intake at potentially lower margins could drag down overall margins for FY13/FY14, in our view.
We forecast standalone EBITDA margins will decline 75bp in FY12 to 12.1% and 75bp in FY13 to
11.3%, with FY14 margins the same as FY13.
Current price appears to factor in macro/micro headwinds
We believe that at the current consolidated P/E of 14.8x FY13F (40% discount to historical
average), the majority of macro headwinds and potential guidance downgrades are already
priced in. Risk-reward looks favourable. Resuming coverage with Buy and Rs1,575 TP
previous cycle, and hence recovery will likely be slow. The current price seems to factor in a
sluggish recovery and possible cut in guidance. Thus, we resume coverage with a Buy rating and
Rs1,575 target price.
Slowdown led by internal factors; recovery likely to be weak
The present investment cycle slowdown is led by cyclical (high interest rate) and structural issues
(fuel shortages, EC clearances, corruption, etc). We expect recovery to be slower than in the last
cycle (2008-2009) as the current slowdown has been led by internal factors, rather than external
factors as in the previous cycle.
Weak macro, award deferrals, increasing competition all weigh on order inflows
Our analysis of L&T’s potential order list (see table 5) suggests a lack of buoyancy due to macro
issues (power, process), award deferrals (roads, ports, metro, power) and/or greater competition
(from hydrocarbon, power segments). Any potential market share gains in infrastructure (factories
& buildings, roads) will not easily offset the slowdown in other segments. While L&T has won
Rs252bn in orders (announced) so far, it will have to win another Rs665bn to meet its 15% growth
guidance for FY12 (FY11 order inflow was Rs798bn), which looks difficult. We expect order inflow
to grow 2% /12%/11% in FY12/ FY13/FY14.
Medium-term margins at risk
L&T’s EBITDA margin rose from 6% in FY04 to 12.8% in FY11; a cyclical high led by operating
leverage and efficiency gains. The company has already guided for a 50-75bp yoy margin decline
in FY12. Given the weak macro outlook and increasing competition across segments, new order
intake at potentially lower margins could drag down overall margins for FY13/FY14, in our view.
We forecast standalone EBITDA margins will decline 75bp in FY12 to 12.1% and 75bp in FY13 to
11.3%, with FY14 margins the same as FY13.
Current price appears to factor in macro/micro headwinds
We believe that at the current consolidated P/E of 14.8x FY13F (40% discount to historical
average), the majority of macro headwinds and potential guidance downgrades are already
priced in. Risk-reward looks favourable. Resuming coverage with Buy and Rs1,575 TP
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