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.