MUMBAI: HSBC has maintained neutral rating on Larsen & Toubro Ltd while cutting the revenue estimates. “We maintain our cautious FY10 outlook on order accretion with FY11 to he driven by new business segment. In the interim, infrastructure and power projects should help with new order inflow,” HSBC said in a report.

“We value L&T’s core business at INR 544 per share (10.6x FY10e EPS). We value L&T’s subsidiaries at INR 116 (previously INR131) per share. Hence, we reduce our target price to INR660 (from INR765),” the report said.

L&T’s last reported order backlog stood at INR 688 billion (2.2x trailing 12 months’ revenue). The private sector contributed 52% of this order backlog, exposing L&T to possible order cancellations or delays. As per management, few of these orders have been delayed by 8-12 months.

Orders that are delayed are INR16 billion Tata Steel’s Kalinagar, INR 8.5 billion Bhusan Steel, few of real estate projects from Middle East (INR 3 billion) and its L&T Urban infrastructure’s real estate projects. As per management, these delayed project orders forms only 5-8% of the order book (INR 35-55 billion) and not a significant risk.

L&T’s order inflow grew at a 41% CAGR during FY05-08. Management has guided to 30% growth in FY09 (72% of guidance achieved by January 2009). “We expect order inflow growth to be muted at c4% in FY10 given the slowdown in new orders from the metals and mining, oil and gas
, and real estate sectors. Also we expect decelerating inflow from the Middle East (9% of order book),” the report added further.

L&T’s order mix has shifted to infrastructure and power, with 65% of its orders from power and infrastructure. This mix shift has helped the company sustain growth in the flow of new orders during FY09 despite a decline in new orders from the oil and gas and the metals and mining sectors.

The report informed further that, L&T’s standalone debt increased by INR 16 billion in 3Q09 (gross debt INR 64 billion). This was primarily to fund its INR 13.5 billion in capex, INR 6 billion in investment, INR 14 billion in loans and advances to subsidiaries and associates, and working capital increase.

The brokerage expect L&T’s working capital requirement to increase further with utilization of existing customer advances as projects achieve their milestones. We also expect the company to increase its loans and advances to its vendors during this credit crunch. This is likely to put additional strain on the L&T’s balance sheet in the form of working capital loans.

HSBC also maintain that, given its cautious outlook on L&T’s core business, the potential Satyam acquisition entails risk related to the commitment of management’s time and other liabilities. Also, the acquisition may not be EPS accretive in the initial years, given uncertainties related to client traction and cost structure.

Monday on NSE at 1 pm, the L&T stock was trading
2.34 per cent up at Rs 598.80.

source: Economictimes

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