L&T: Stock analysis

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Robust guidance, order book augur well
Jitendra Kumar Gupta / Mumbai May 20, 2010, 0:55 IST

A stellar performance for the March 2010 quarter has seen Larsen & Toubro’s (L&T's) share price outperform markets in the last three sessions and analysts upgrading the stock. On a standalone basis, L&T reported a 27.8 per cent rise in revenues and 18 per cent growth in net profits. More important, confidence levels have increased, led by a significant improvement in order inflow.

The company’s order book (pending orders) crossed the Rs 1,00,000-crore mark. The current order book is almost 2.5 times its consolidated turnover and provides good revenue visibility for the next two-three years. Further comfort comes from the management’s confidence of achieving 20 per cent growth in revenue for 2010-11, besides 25 per cent in order book.

Growth all around
L&T generates about 85 per cent of its revenue from the engineering and construction (E&C) segment, which grew 30 per cent during the March quarter. The E&C segment has benefited on account of large flow of orders from the power, hydrocarbon, process and buildings & factories sectors. The segment reported a 95 per cent year-on-year rise in new orders to Rs 22,057 crore during the quarter.

For 2009-10, revenue growth was largely driven by domestic market as export revenues (about 18 per cent of total revenues) grew just 9.5 per cent. Flow of new orders continues to be subdued, too.

Meanwhile, led by lower commodity prices, operating margins of the E&C segment also improved by 60 basis points in 2009-10. However, the margins need to be watched, considering that commodity prices have risen from their lows. Further, helped by domestic industrial recovery, particularly in the second half of 2009-10, L&T’s electrical & electronics segment reported a 28 per cent growth in revenue during the March quarter. More important, higher utilisations, better product mix and lower input cost helped the business improve margins by 220 basis points in 2009-10.

Investment rationale
The company's outlook has improved with the revival in India’s economy, along with higher infrastructure spending. Also, the revival in private capex should translate into improved revenue visibility. On the back of a strong order book and improved outlook, analysts expect the company's net profit to grow 20-22 per cent annually over the next three years.

Additionally, the expected value unlocking in some of its subsidiaries, such as L&T Finance, L&T Infotech and L&T IDPL through the IPO or stake sale route, would be key triggers in the medium term.

Meanwhile, analysts value the stock in the Rs 1,700-1,900 range. While there are some gains to be made in the near term, considering the current price of Rs 1,636.40, L&T is also a good long-term opportunity capable of delivering healthy returns.

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