L&T was our top sector pick for CY12, given favourable valuations and low consensus expectations.
While we expect L&T to meet its FY13 guidance, our bottom-up analysis suggests continued weakness in the investment cycle in FY14, presenting downside risk to FY14 order estimates.
The cancellation of two road orders recently (worth R4,700 crore) negatively impacts our order estimates. We lower our price target to R1,750 from R1,851.
Given limited returns over the next 12 months, we downgrade our rating to EW. We expect L&T to meet its FY13 order inflow guidance of 15-20% y/y growth. L&T’s order inflows in 1H FY13 have remained on track on account of its diversified exposure to sectors like construction (infrastructure) and T&D contributing to c70% of total inflows (1H FY13).
L&T is the lowest bidder for the boiler package at NTPC’s Tanda project (1,320 MW), worth cR1,800 crore, and is also the lowest bidder in technical bids for the cR14,000 crore worth of RRVUNL power projects (price bids to open in 4Q FY13). Some large oil & gas orders are expected to be finalised (West Asia), while infra ordering will likely recover in 4Q (road ordering to commence and DFC tenders to be opened).
We expect working capital levels to remain under stress, but expect cash flows to recover as the pace of increase in working capital consumption slows. We expect margins to be aided by weak competitive activity in the infra segment. Ebitda margins should remain in the range of +-50bps.
We see risk to FY14 order growth estimates of c15% as we expect power BTG and industrial capex to remain weak and T&D order growth to slow. Infrastructure will remain well placed relative to other end-markets, in our view.
We expect L&T to now report only 10% growth in order inflows in FY14 (versus prior estimate of 14.5%). This impacts our EPS estimates by 0.24-1.1% over FY13-FY15. Consequently we cut our price target to R1,750 (target multiple for standalone business cut to 16x from 17x to reflect the lower order growth estimate).
Given limited upside to the current stock price, we downgrade our rating to EW.Barclays