1. Buy rating on Larsen & Toubro: Better days lie ahead for L&T

Buy rating on Larsen & Toubro: Better days lie ahead for L&T

Execution pick up & transitioning balance sheet to drive earnings growth for the company

By: | Updated: December 28, 2015 12:06 AM

The earnings and orders miss in 1HFY16 might suggest that nothing is going right for L&T; however, we believe that after a weak FY16F, L&T is well placed for an earnings recovery and improving RoE on the back of:
* Management’s decision to change the company’s focus to asset light businesses and unlocking value from its subsidiaries/JVs over the past two years and going forward (real-estate, Dhamra & Kattupalli ports, L&T Finance, L&T Infotech).
* A pick-up in execution in long-gestation projects to drive 20% revenue CAGR over FY16-18F in the core E&C business, in our view. Unlike orders in the power equipment sector, we think L&T’s order backlog is only ‘slow-moving’ or even ‘slow to start’ rather than ‘non-moving’ as in the case of BHEL (BHEL IN, Reduce, TP R123).
* Margin recovery as several long-gestation orders reach margin recognition thresholds coupled with tailwinds from the decline in commodity prices.

With bulk of the problems now behind the company, we expect earnings pick up from FY17F and estimate 35% EPS CAGR for L&T over FY16F-18F.

Catalysts: Pick up in execution and margin recovery

Valuation: Trading at ~19.7x FY17F earnings, L&T is not inexpensive. However, the current order backlog provides strong growth visibility and will likely lead to a recovery in RoE and FCF metrics. We switch to consolidated earnings as they better reflect L&T’s new business segments and reduce TP to R1,663 as we now value L&T on SoTP of its individual business segments . Our new target price implies FY17F P/E of 25.6 and EV/Ebitda of 15.6. With expected growth in Ebitda from FY17F as more projects mature we believe our EV/Ebitda multiple of 15.6x is justified given the risks. Slower than expected recovery in the economy and investment cycle are key risks.

Weak near-term outlook; but long-term growth story remains intact

L&T’s recent correction is a reflection of past concerns and a weak economy. L&T’s share price has corrected by 12% in the last three months against a decline of 1.4% for the Sensex. In our view, this factors in the short-term weak outlook for orders as well as a slow execution cycle.

In our view, the current troubles are largely as a result of past decisions. However, we do not think the market is factoring in improvements that these investments will deliver once the execution cycle improves and projects under execution currently start to deliver cash flows.

Lessons from the past—L&T is now taking corrective action

Transition to asset heavy model has led to profitless growth and high gearing. L&T decided to embark on an asset heavy business model from an asset light model from FY11. This investment in assets was largely debt financed and envisioned as long-term cash generators. While the assets have so far delivered decent growth in revenues and operating profits, they have failed to deliver any bottom-line growth.

L&gr

  1. H
    Harry Potter
    Dec 28, 2015 at 3:29 pm
    Annus horribilis for L&T - Annus mirabilis for L&T executive, 3 of these failed executives are in 2015 Top-10 Highest Paid pro executives of India Inc. L&T bres have displa geriatric trait of biting more than they can chew. Later cry foul policies, political situations etc. Hydrocarbon projects losses of 900 cr, they concede it as error of judgment, underestimating risks, aggressive bidding, and overestimating capabilities. Cost overruns in Hyderabad/Riyadh metro, 5k cr of stagnating investment in defence - they want to build ‘India’s defence capabilities’ – please do BUSINESS of profits. GoI is under no obligation to commit fixed orders. Laxmi Mittal the steel magnet have no time to cry/blame - dead busy expanding his empire from north pole to south pole, no less India lover, still holds Indian Pport, will do business in India at right time. Why L&T is asking for VGF? Do your calculations bear risk – simple. Jeff Bezos – Amazon CEO- “when asked whether doing business was easy in India, he said, ''doing business is not easy anywhere. Every country has its quirks, differences and uniqueness, companies must work around them".-------------------------------------------------------------------------------------------------------------Even self-confessed Avatar Purush like Chairman A M Naik seems to be failing to manage L&T - Mr Naik's views on succession - why Mr Naik is slogging at 73 – Quote- You find a man in the world who will kill himself four times a day, has worked for more than a hundred years-- There is no such person.-- None of us here (at senior level) are working for money -UnQuote. LnT stock touched 18 month low of 1331 (Nov 14 2015) , from all-time and 4 months peak of 1879 (July 10 2015). Lost whopping 29 percent in last 4 months. Net debt as on 30 Sep 201598 thousand crores. Would it hit 3 yr low of 722 in a quarter or two?--------------------------------------------------------------------------------------------------------------------------------------------------------To quote Mr Naik "there is no bloody owner at L&T". It is not just Mr Naik L&T is personal fiefdom of a old-men club, it is divided between septuagenarians vertical wise - CEO Mr Vekataramanan (alas hanged boots in Sep 2015), responsible for hydrocarbon business and its heavy losses. Mr Magapu is responsible for stagnating IT business L&T Infotech and L&T Tech services, Mr Deosthali is CEO of L&T Financeholding, LnT Finance not made any money for shareholders in 6-7 yrs,, Mr MV Kotwal man in charge of L&T's defence forays, 5k crores of futuristic investment oin defence is junking. These gentlemen are nearly /above 70. Career span of 50 years as paid employees in a company where state owned LIC/UTI are biggest stake holders - SCANDALOUS - in a country where millions are job less. PM Mr Modi, should intervene to fix retirement age at LnT from SCANDALOUS 75 to 60 - ASAP!! All and sundry above 60 at L&T leading the pack Mr Naik (aged 73) Leave Now!!---------------------------------------------------------------------------------------------------------------Please allow me to give you all a glimpse (trailer) of a public sponsored circus - Gymnastics by 70 ton Gorillas and Dinosaurs on-going show at L&T please refer BS articles - L&T: International orders worth Rs 30,000 cr at risk - and - why analysts are angry with L&T. Some excerpts - What has angered analysts the most is that the company did not in any way prepare the market for a Rs 900 crore loss. - L&T calls it an error of judgment, as it underestimated risks and overestimated its own capability- Investors and analysts allege the company frequently changes the financial reporting structure, making year-on-year comparison difficult. Some exotic nonsense by geriatric in chief - why Mr Naik is slogging to find successor - " you find a man in the world who will kill himself four times a day, has worked for more than a hundred years;--The day you find such a man he is my successor." - Mr Naik is right, well chronicled life span in modern times is 122 years. On one hand top-bres are taking their compensation and retirement to the highest level possible, on other hand FIRING young talented employees - Please GOOGLE --"Cl Action Suit Seeks $100 Million for Pregnancy Discrimination, Other Violations".Can employees, investors, analyst TRUST these dinosaurs - All and sundry above 60 Leave Now!!-----------------------------------L&T in melting - devil or the deep blue sea - stake or post losses. L&T in melting - devil or the deep blue sea - stake or post losses. Complete stake at Dhamra Port (Rs 2500 crores) to Adani group saved LnT from posting losses in q1-2014. LnT Inra stake to Canadian FII (2000 crores) saved LnT from posting losses in q2-2014. LnT Finance not made any money for shareholders in 6-7 yrs, 10% stake sold to Bains, 1300 crores. Kuttapali Port deal final with Adani. On a look out to sell Rajpura Power plant – cost 9600 crores. Plans to sell 15% stake at LnT Infotech to raise 2k crores. Threatened to pull out from Hyderabad Metro 16 k crores, LnT opts out of GAIL tender to build LNG carrier, ss Kachchigarh Gujarat port project. L&T’s commercial real estate project in Chandigarh sold to Carnival Group – Rs 1785 crores. LnT Halol Shamlaji Tollway defaults on Rs 1014 crore loan. LnT Chennai Tada Tollway defaults on Rs 475 crore loan. Inherent malignancies – Hydrocarbon and Ship Building losses of Rs 900 cr each, Hyderabad Metro cost overruns Rs 4k crores, Rs 5k crores stagnating investment in Defence. Financial mismanagement charges see a dozen leaving L&T Hydrocarbon arm. Aging CXO-MD potion of septuagenarians, leading the pack 73 yrs old Chairman Mr Naik completed 50 yrs with LnT as Paid Employee. LnT stock touched 18 month low of 1270, from peak of 1879 - Total consolidated debt 98 thousand crores - would it hit 3 yr low of 722 in a quarter or two? ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- L&T Chairman (aged 73) Mr Naik-s brainchild, LnT Infotech is stunted juvenile. Founded as LnT-IT in late 80s, renamed to LnT Infotech in 1997 claiming to touch $1 billion in revenues since 2010 – still not there. Cognizant founded in 1997 is more than $10 billion in revenues. Sans DNA destruction of work culture and mockery of corporate governance at LnT, LnT Infotech could be what TCS is for TATAgroup companies, a great saviour for old-economy TATA companies. LnT Infotech a proven laggard, in news for failed attempt to bid for Satyam, Patni, Polaris, Hexaware, rumoured sell off to Fujitsu. Perennial entry/exit of lateral CXOs, listing gimmicks – it’s in shambles. Year 1999, Mr Naik appointed CEO of LnT group, Infosys headcount in March 2000 nearly 5k, now nearly 1.7 lakhs and LnT Infotech is nearly 20k. What policy paralysis, RBI rates etc Mr Naik wants to blame for this most dismal performance in IT space? LnT has failed to cut even 1% of IT business pie of $116 billion in India. LnT Infotech in IT space for more than quarter of a century (25 years) and not even $1 billion in revenues, headcount less than 20k! Please GOOGLE – white collar criminal equivalent of rape and murder- “Cl Action Suit Seeks $100 Million for Pregnancy Discrimination, Other Violations”. All and sundry above 60 at L&T Leave Now!!-------------------------------------------------------------------------------------------------L&T is an example of brazen disregard for merit and professionalism , a mockery of corporate governance. L&T legacy of true founders Danish engineers Mr Ln and Mr Toubro is in clutches of despotic geritocracy. Leading the pack of engineers who joined L&T in 60s is Chairman Mr Naaik. State owned LIC and UTI are biggest stakeholders, upto 10 and 17% each. Mr Naik's views on succession - why Mr Naik is slogging at 73 – QUOTE- You find a man in the world who will kill himself four times a day, has worked for more than a hundred years-- There is no such person.-- None of us here (at senior level) are working for money -UNQUOTE. Please refer ToI article – Vibrant Gujarat summit Day 1: 25 private jets bring high-flyers. Excerpts –Cabinet ministers arrived via scheduled flights -- private jet of AM Naik left immediately after arriving –. State owned LIC/UTI are biggest stakeholders at L&T, PM Mr Modi should intervene to restore insutional integrity at L&T and fix retirement age to 60. It is like BCCI a cozy club of septuagenarians, all above age of 60 should be smoked out of L&T---------------------------------------------------------------------------------------------------------------------- Please GOOGLE - L&T fraud / forgery /harment / risk / succession / default to know more about blood curdling Egyptian Mummies. Like Satyam L&T was also barred by the World Bank over forgery. PM Mr Modi should intervene to restore insutional integrity at L&T. It is like BCCI a cozy club of septuagenarians, all above age of 60 should be smoked out of L&T. All above 60 at L&T Leave Now.---------------------------------------------------------------------------------------------- 3 of the failed executives of sinking ship L&T are in list of 2015 top ten highest paid pro executives of India Inc, leading the pack Chairman Mr Naik 27 crores. Cost of public sponsored circus at L&T - number ofCxOs/MDs at L&T and all its subsidiaries (138)- their CTC? Just CEO (Mr Venkatraman alas retired Sep 2015) and Executive chairmen of L&T pegged at Rs 14 and 27 crores, Mr Dubhashi of L&T Finance 21 crores only. KUMBH-MELA factories of old to very-old CXOs/MDs. L&T top bres have displa geriatric trait of biting more than they can chew and digest, than they are putting blame on policies etc. Where they not aware of Telengana movement? Now asking VGF - blackmailing newly formed state, threatened to pull out. How many farmers get Viability Gap Funding before committing suicide? They have implemented international hydrocarbon projects at losses of 900 crores, they concede it as error of judgment, underestimating risks, aggressive bidding, overestimating capabilities. 5000 crores they have invested in defence, again crying foul on name of policies. Biggest shareholders at LnT are state owned LIC/UTI. PM Mr Modi should intervene to fix retirement age at LnT to 60 - ASAP. All and sundry above 60 at L&T Leave Now!!----------------------------------------------------------------------------------------------------------------------------------------------------------------Frank De Souza appointed CEO of Cognizant at 38, HRD Minister Ms Irani 38, Vivek Murthy, Surgeon General - US, is 37. Vishal Sikka, Infosys CEO 46, Cyrus Mistry TATA top-man 44, N Chandrasekaran appointed CEO of TCS at 46, Raghuram Rajan appointed RBI Governor at 50, Indira Nooyi appointed CEO of PEPSI at 50. Rajeev Suri, CEO Nokia 47. Arun Sarin appointed CEO of Vodafone at 50. Staya Nadel, CEO Microsoft 46, Ajaypal Singh Banga appointed CEO Master Card at 50. Tulsi Gabbard, youngest woman in the US to be elected to a state legislature at age of 21. India got its first PM born post independence. Avg age of India in 2020 will be 29. --------------------------------------------------Credit goes to Charcoal Colored Hair (Eyebrows) and White Elephant Syndrome. L&T is plagued with A MaN made leadership crisis. L&T is India Inc's biggest Geritocracy - (by, for and of Geriatrics), leading the pack Chairman Mr AM Naik, oldest (aged 73, compensation 27 crores) one of the highest paid ‘professional’ honcho in India Inc. Mr Naik's views on succession - why Mr Naik is slogging at 73 – Quote- You find a man in the world who will kill himself four times a day, has worked for more than a hundred years-- There is no such person.-- None of us here (at senior level) are working for money -UnQuote. Please refer ToI article – Vibrant Gujarat summit Day 1: 25 private jets bring high-flyers. Excerpts –Cabinet ministers arrived via scheduled flights -- private jet of AM Naik left immediately after arriving –. State owned LIC/UTI are biggest stakeholders at L&T, PM Mr Modi should intervene to restore insutional integrity at L&T and fix retirement age to 60. It is like BCCI a cozy club of septuagenarians, all above age of 60 should be smoked out of L&T------------------------------------------------------------------------------------------------------------------------Here is the list of lateral CEOs who left L&T, Dr Panda of scam tainted Satyam is an exception ---Its a Catch-22 situation young insiders are not good enough for the top jobs at LnT and its subsidiaries, outsiders (laterals) cant with stand Despotic Gritocracy the old-men club. Top-men-eater Egyptian Mummies. Infotech ex-CEO Mr Banerji, two last joint CEOs Mr Chopra and Dr Aghi – QUIT. Mr Ravi Uppal CEO LnT Power (Mr Naik's potential successor)–QUIT. CEO LnT General Insurance Mr Joydeep Roy – QUIT. CEO LnT MF Mr Sanjay Sinha – QUIT. Old-men club is singing this bad chorus and opera a distorted version remix of Brayan Adams songs - 18 till I die and Summer off 69 - oh ya!. The band joined LnT some time in 60s. This public sponsored deafening cacophony and distortion should be stopped.--------------------------------------------------------------------------------------------------------------------Please GOOGLE - L&T fraud / forgery / harment / risk / succession / default / corruption - to know more about blood curdling Egyptian Mummies. Like Satyam L&T was also barred by the World Bank over forgery. PM Mr Modi should intervene to restore insutional integrity at L&T. It is like BCCI a cozy club of septuagenarians, all above age of 60 should be smoked out of L&T. All above 60 at L&T Leave Now!
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