| Summary of Content | STOCK UPDATE Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs2,011
Current market price: Rs1,630 Q1FY2012 results: First-cut analysis Result highlights -
Results in line: Larsen and Toubro (L&T)'s Q1FY2012 results were a mixed bag-the overall profit after tax (PAT) was in line with our expectation led by a boost in the unallocable corporate income even as the segmental margins remained under pressure. Revenue-wise, its engineering and construction (E&C) division outperformed all expectations by registering a year-on-year (Y-o-Y) growth of 22.8%. The order inflow was modest for the quarter (up 3.6% year on year [YoY]) while the order backlog grew by 26.3% YoY to Rs136,172 crore (the same was, however, flattish on sequential basis). The company has maintained its guidance of Y-o-Y growth of 25% in revenues and 15% in order inflows for FY2012. The company has also indicated that in the current fiscal the margin could experience pressure of 50-75 basis points (in FY2011 the OPM stood at 11.7%) on account of an increase in the input cost. -
Stand-alone sales up by 21.1%: L&T reported a strong rise in its revenues (stand-alone) for the quarter. The revenue growth was in line with our expectation of a 21.9% Y-o-Y increase in the revenue. This was mainly on account of a pick-up in the revenue of the E&C segment. The E&C division reported a 22.8% growth in its revenue which was marginally below our expectation of a 25% Y-o-Y revenue growth. The electrical and electronics (E&E) division reported flattish revenue for the same period. The machinery and industrial products (MIP) division reported a robust growth of 26.3% YoY for the quarter. -
Overall margin stable, but segmental margins under pressure: The company has significantly regrouped its numbers under many heads. The overall operating profit margin (OPM) was robust at 11.9%, higher than our expectation of 11% but lower than 12.8% in Q1FY2011. Margin pressure was visible on account of higher input and employee costs. If we look at the segmental margins, the margin of almost every segment was under severe pressure. The biggest booster to the overall margin was the unallocable corporate income (which primarily includes interest income, dividends and the profit on sale of investments), which was higher by 179.7% YoY at Rs209.1 crore. The company has indicated that the rise in this income was primarily due to higher income from treasury operations and forex gain. -
Net profit up by 9.1%: Led by higher depreciation and interest, the adjusted PAT reported a 12% Y-o-Y growth, which was in line with our expectation. -
Modest order inflow during the quarter: The order inflow for L&T was modest during the quarter, coming in at Rs16,190 crore (up 3.6% YoY) due to order booking in the E&C division (Rs14,416 crore). The order inflow for the quarter was largely driven by the orders in infrastructure and power sector. Currently, L&T's order backlog stands at Rs136,172 crore (up 26.3% YoY but flattish on a sequential basis). The company's management has indicated that the ordering environment still witness the deferral of award decisions and stiff competition. -
Outlook and view: While the company reported robust results for the quarter, the achievement of the order inflow guidance would be highly subjective to uptick in infrastructure development activities in the country and the Middle East region. We are also concerned on the margin pressure in view of rising input costs, particularly metal prices. Also, depreciation would also jump sharply in view of the recent capex undertaken by the company. Nonetheless, maintenance of the robust growth guidance for the year reiterates the company's confidence in its execution capabilities and bidding pipeline in the infrastructure sector. We would now be revisiting our estimates, our target price and recommendation on the stock and would soon come out with a detailed note on the same. Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs735
Current market price: Rs666 Q1FY2012 results: First-cut analysis Result highlights -
Mahindra & Mahindra (M&M)'s total income growth at 30.5% year on year (YoY) for Q1FY2012 came in marginally lower than our estimates. However operating profits surpassed our estimates due to the cost rationalisation efforts of the company. -
Q1FY2012's profit after tax (PAT) also came marginally higher than our estimates at Rs604.9 crore. -
The capital employed figure for the tractors division jumped sharply by 40% YoY. This is on account of a sharp increase in working capital requirement to meet the forthcoming festive demand. -
The company is likely to see only a moderate volume growth in FY2012 as macro headwinds such as financing rates and fuel price hikes could impact buying sentiments. However raw material prices are likely to remain stable for the rest of the year. Given the in-line performance during the quarter, our estimates are unlikely to change significantly from hereon. We will release a detailed note post management interaction. IL&FS Transportation Networks
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs330
Current market price: Rs198 Price target revised to Rs330 Result highlights -
Earnings ahead of estimate: In Q1FY2012 the consolidated adjusted net profit of IL&FS Transportation Networks Ltd (ITNL) increased by a 11% year on year (YoY) to Rs116 crore, which was higher than our estimate of Rs107 crore; this was mainly due to lower than expected depreciation and interest charges. In fact, on a quarterly basis the depreciation and interest charges registered a decline of 12% and 20% respectively. The revenue grew by 41% on account of strong execution and robust income from the build-own-transfer (BOT) segment. The construction division's income grew by a robust 74.6% YoY supported by the timely execution of the projects under construction (except for the Jorabat-Shilong project). The BOT income grew by 47.6% driven by increased daily collection across operational projects and the commissioning of projects like the Beawer Gomti project and the Hyderabad Ring road. Elsamex has witnessed a poor performance but the revenue drop has been limited to 35.4% on account of rupee depreciation against the Euro. -
Higher proportion of E&C revenue results in margin contraction: The operating profit margin (OPM) contracted by 340 basis points to 30.3% in Q1FY2012 as compared to 33.7% in Q1FY2011 but the same was higher compared to our estimate of 28.3%. The margin contracted on account of a higher proportion of revenue from the engineering and construction (E&C) division (the projects are in construction phase), which generates a much lower margin compared to the BOT segment (where the project starts generating toll/annuity). The share of the E&C revenue in the overall revenue increased to 69% in Q1FY2012 from 55.6% in the corresponding quarter of the previous year. However, the margin in Elsamex India improved to 9% from 6.1% in the corresponding quarter of the previous year. The operating profit stood at Rs331 crore, up 27% YoY. -
Positive surprise, interest cost and depreciation down on sequential basis: The interest charge during the quarter increased by 35% YoY whereas on a sequential comparison the cost actually decreased by 20% to Rs143 crore, which was way below our estimate of Rs180 crore. The sequential fall in the interest cost was mainly on account of a one-time fee charged on achieving the financial closure for the Chennai Nashri project. The depreciation charge increased by 23% YoY but declined by 12% sequentially to Rs16 crore. -
Earnings estimates for FY2012, FY2013 fine-tuned: We are downgrading our revenue estimates for FY2012 and FY2013 mainly to factor in the lower than expected order inflow. However, we are factoring in the better than expected OPM which will partially offset the negative impact of the lower than expected revenue. The revised earnings per share (EPS) estimates now stand at Rs23.5 and Rs27 for FY2012 and FY2013 respectively. -
Maintain Buy with revised price target of Rs330: The National Highways Authority of India (NHAI) plans to award approximately 7,300km of roads this fiscal; of this 20% cost more than Rs2,000 crore and thus would attract lesser competition. Given ITNL's leadership position in the road vertical, we believe the company would be one of the major beneficiaries of the NHAI's proposed road project awarding activity. Further, the strong parentage of IL&FS and its strong relationship with state governments along with a relatively diversified and de-risked business portfolio boost our confidence in the company. However, we have downgraded our PE multiple for E&C division to factor in the macro headwinds and hence we have revised our price target to Rs330 and maintained our Buy rating on the stock. Currently, the stock is trading at 8.4x and 7.3x its FY2012E and FY2013E earnings.
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