L&T: Q1 Result Below Estimates As "Global Uncertainities & Unhurried Pace Of Reforms In India Hurting"--Below 1825, Could Fall To 1544

Technical Charts:

Technical Analysis: (Time & Price)

LT (CMP: 1791) has to sustain over at least 1825-1840 for a meaningful rally up to 1853-1864 & 1880-1895 immediately. Only consecutive closing above 1895 area, LT may target 1935-1970-2000 & 2050-2105 zone in the near term. In the long term, sustaining above 2105, LT might scale up to 2300 under bullish market scenario (FY:16-18).

On the flip side, inability to sustain over 1825, LT may face selling pressure and could fall to 1802-1780-1751-1737-1707 zone immediately. Consecutive closing below 1707, LT may further fall to 1677-1661 and  1643-1620. Sustain below 1620, LT may crash to 1592-1573-1544 & 1532-1514-1470-1450 in the worst bear case scenario.

Technical Trading Levels (Positional)

	SL</>10	FROM SLR
		LT	CMP	1791
			T1	T2	T3	T4	T5	T6	T7	SLR
Strong >	1840		1864	1880	1895*	1935	1970	2000-50	2105	<1825
Weak <	1825		1802	1780-51	1737-07*	1677-61	1643-20	1592-73	1544-32	>1840

Stock Analysis & Some Inputs:

Q1FY16 result of  LT, published after market hours on last Friday is way below street estimates in nearly all counts. The company reported nearly 37% lower profit at Rs.606.2 cr against Q1FY15 figure of Rs.966.9 cr (both consolidated).

Although in the previous year there was exceptional gains (related to various stake sales) for Rs.249.3 cr, analysts were expecting a figure of around Rs.830 cr against adjusted last year actual operating figure of Rs.717.6 cr (966.9-249.3). 

But the management maintained that the above figure of Rs.249.3 cr should be Rs.1383 cr (proceeds from last year stake sale/disinvestment). In any way, EBITDA is also below estimates (at Rs.2290 cr against estimate of Rs.2407 cr with Q1FY14 at Rs.2511 cr) amid subdued revenue & contraction of operating margin. Metallurgical and material handling is mainly responsible for weak numbers and the management blamed the global uncertainties and tepid pace of reforms back home. Also there is adverse impact of falling crude oil prices and glut in overall commodity markets, which is clearly visible on overall Q1 result of LT.

Although management is cautious in the short term, its maintaining the overall FY16 guidance at 15% growth regarding order inflows & revenue, although it sees sluggish pace in infra segment, lack of investment momentum in industrial capex and consequent subdued performance in Heavy Engineering business in the short term. The company is hopeful of overall economic recovery in H2FY16 amid lower bank interest backdrop and better macroeconomic picture in the days ahead. Consolidated order book of LT stood around Rs.2.39 lk cr, which is up by 22%  y-o-y and of late, power, hydrocarbon segment showing signs of visible improvement. But the key question is now, will the market believe in LT's order guidance and actual projects implementation/revenue

LT, which is viewed as desi Caterpillar (corporate proxy or bellwether for the Indian economy), rallied almost 170% during the last two years (comparable to China bubble !!) on the back of "Hope Rally", outperforming the overall market quite significantly. The market may give LT another chance till H2FY16, when all are looking/dreaming for a overall economic recovery. Due to various stalled projects and consequent stretched balance sheets of its clients, LT's own balance sheet is now in some type of difficult situation and working capital is now stood at 25% of revenue which was around 10-12% some years ago. Power equipment business is another area, which is also under stress and may hurt LT and some other companies like Thermax, JSW Energy, Bharat Forge, BGR Energy etc.

Going ahead, for LT, the only silver lining in short term apart from its gigantic order book might be its disinvestment (stake sale) plan , for an exit of non-core business gradually. It will shortly sell around 15% stake (around Rs.2500 cr) in its IT arm L&T Infotech by OFS, Also, there is strong market rumour that L&TFH might also sell its stake held by LT to a US based PE fund. 

Although, in the medium term, theme like "Smart City" might help LT (if implemented in reality), what we need is quicker pace of actual reforms and not mere "vision statement". Recently Moody's also raised concern over slow pace of key reforms and denting investor confidence in India due to some unwanted controversy like MAT, Sun TV and Nestle fiasco etc.

For the Govt, to keep alive "Modinomics" theme, RS majority is now the most important priority, but given the real political picture, this may not be so easy considering less visible "Modi" wave unlike in the last LS election.

Clearly "patience" is running out among investors and LT as well as the broader market might do some reality check till GST bill see the light of the day for some change of market sentiment.

Techno Funda Valuation As Par BG Metrics (Modified):

Current Median Valuation: 1465

Projected Fair Valuation: 1570-1750-1925 (FY:16-18) 

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	LONG TERM	SHORT TERM	MEDIAN VALUE	200-DEMA	10-DEMA
LT	65.46	456.39	18.87	1432.45	1492.32	1462.38	1661.15	1802.91

LT

75.05

547.67

18.87

1533.79

1597.90

1565.84

1661.15

1802.91

LT

93.05

857.25

18.87

1707.85

1779.23

1743.54

1661.15

1802.91

LT

113.1

1030.05

18.87

1882.88

1961.57

1922.22

1661.15

1802.91