Except order inflows, nearly all the other key parameters
are virtually below street expectations in Q3FY16
Going forward, timely order execution cycle and OM will be the key
Consecutive closing below 1110, may fall up to 1065-1040-995 in the near term
CMP: 1102
Either sell around 1110-1130 or on rise around 1160-1175;
TGT1: 1065-1040*-995-950 (1-6M)
TGT2: 898*-860-780-675 (12-24M)
TSL > 1195-1205
Note: Consecutive closing above 1195-1205 zone for any reason, L&T may rally up to 1260-1291 & 1378-1415 zone in the mid to long term under alternative bullish scenario.
Q3FY16 PAT of L&T was up by nearly 19% (YOY) & 4% (QOQ) at around Rs.1035 cr against median expectations of Rs.1050 cr (YOY-867 & QOQ-996). Q3 PAT was largely supported by treasury gains and lower interest costs.
However, Q3 EBITDA was down by nearly 8% on YOY basis at around Rs.2650 cr and missed estimates of Rs.3082 cr. Also overall OM fell sharply by around 1.86% to 10.3% and moreover, its core division of infra & engg business saw OM dipped to 7.4% from 10% in Q3 (YOY).
Historical OM of L&T was around 15% and along with tepid growth in net revenue, it may be a cause of great concern for the company. The management attributed to this fall in margin to project execution delays and slow order movement and warned that margin may be remain under pressure in the foreseeable future. In Q3, margin was mainly impacted by surge in employee cost (up by 25% YOY) and sales & distribution costs (up by around 35% YOY).
As par the L&T management, actual revenue and EBIT from its key infra segment grew only by 2.5% & 0.6% (YOY) due to delay in project clearances and payments on certain jobs. But power business revenue doubled with EBIT grew by almost 19% YOY on progress of coal & gas based projects under execution. Although there was some revenue growth in heavy engg and defence & aerospace, but at EBIT level, the same was translated into loss against YOY profit amid cost & time overruns on certain process plant & nuclear equipment jobs and under recovery on some fixed overheads. Notably, Hydrocarbon business saw some volume growth of around 23% in Q3 and EBIT improved to profit of Rs.39.3 cr against YOY loss of Rs.137.2 cr.
As par the L&T management, actual revenue and EBIT from its key infra segment grew only by 2.5% & 0.6% (YOY) due to delay in project clearances and payments on certain jobs. But power business revenue doubled with EBIT grew by almost 19% YOY on progress of coal & gas based projects under execution. Although there was some revenue growth in heavy engg and defence & aerospace, but at EBIT level, the same was translated into loss against YOY profit amid cost & time overruns on certain process plant & nuclear equipment jobs and under recovery on some fixed overheads. Notably, Hydrocarbon business saw some volume growth of around 23% in Q3 and EBIT improved to profit of Rs.39.3 cr against YOY loss of Rs.137.2 cr.
Q3 consolidated EPS was 11.07 against consensus of 12.68 (YOY-9.27 & QOQ-10.65).
The only silver lining was that, L&T procured fresh order of around Rs.38528 cr in Q3FY16 against expectations of around Rs.25000 cr. The Q3 order inflow was up by 11% (YOY) amid surge in infra order. At Q3, total order book size was around Rs.2.56 lakh cr up by healthy 14% YOY and within that order book, international order counts for around Rs.70000 cr (i.e. about 27%). There was international order for around Rs.11000 cr in Q3FY16.
But some analysts are adopting cautious stance on this huge order book as ultimately timely execution of the same and management of working capital will be key for earning reflection.(which only matters.).
At the same time, L&T management is cautiously optimistic about the overall economic outlook in the near term and relying heavily on the public sector (Govt) spending to achieve its FY-16 target, but some analysts feel that may be quite tough.
L&T management feel that domestic economy will continue to face headwinds as tight liquidity & weak global cues has kept the markets tentative (uncertain). It further feel that drastic fall in oil & commodity prices, China slowdown and significant depreciation of EM currencies against USD has contributed to a volatile economic environment and industrial & private sector capex will likely to be remain muted in the near term.
L&T management sees some hope on improved state & central fiscal positions, moderate inflation, softer interest rates, increased allocation of plan expenditure. Also accelerated reforms and business enabling policy initiatives are expected for better investment climate in India in the days ahead.
But, having said that, 7-PC, OROP etc may drag both the central & state finances and unpaid oil & fertilizer subsidies may continue to put strain on fiscal deficits.
Clearly, L&T, the bellwether of Indian economy or the "desi Caterpillar" is not very enthusiastic about the overall domestic and also global economic outlook.
The order flow growth guidance as indicated by L&T was around 10% in the start of FY-16, which was subsequently lowered by 7% in Q2FY16 and now again adjusted it just to the FY-15 level (Rs.1.55 lakh cr).
But still it means that, L&T need to get fresh orders of around Rs.62000 cr in Q4FY16 (till Q3FY16, total order inflow was around Rs.93548 cr) i.e. an increase of around 28% YOY & 58% sequentially (QOQ) to meet the above target as Q4FY15 order inflow was at around Rs.47600 cr. This may be a tall task by the company.
L&T is relying heavily on infra order/project executions in Middle East despite soft Oil prices and dwindling fiscal position of those Oil rich countries. In the domestic front, the company is hopeful for more Govt. orders in the railways, infra and the defence sector in the coming months.
Now, all the above sets of news may have been largely discounted by the market as it has already corrected by over 40% since mid-July'15 top of around 1890.
Looking forward, technically 1065-1040-995 may be a strong support zone for L&T unless Nifty holds 7200-7100 level. If Nifty broke this level, then L&T can also dip to 898-860 zone; i.e. going forward, L&T may be a market performer, unlike huge under performer for the last few months. But overall downtrend may remain, if it does not sustain above the key level of 1160 in the near term.
Looking at the chart, L&T is clearly in the corrective EW cycle since mid-July top and after the full cycle (1-5 & A-B-C), currently it may be in the fresh corrective EW cycle in daily mode. The extended target of the current 1-st wave may be 1040-990 zone, if sustained below 1065 area. This downside EW may be invalidated, if it close consecutively for at least 2/3 days above the 1160 zone.
Going forward, apart from its usual core operations & order inflow news, deleverage may be the drivers of the stock. As par reports, Adani Powers may buy one of the L&T thermal power units in Punjab for around Rs.3300 cr along with the projects debts. This power plant was set up by L&T for around Rs.9600 cr two years ago. The plant is running around 50% capacity as Punjab is a power surplus state now and there are some contractual controversy regarding power generation cost with PSPCL. Adani group may be ideal for smooth functioning of the plant.
L&T may also sell some of its cement plants, L&T Finance stake (which is a ongoing process !!) and it may also list the L&T Infotech in the months ahead. Although these deleverage news is already known to the market, actual implementation & figures/facts may support the stock from sudden drastic fall from time to time.
Analysts are also of the opinion that despite the L&T management sees some "green shoots" in the domestic economy, the Q3 result itself indicates that overall economic environment still remains very challenging and expectations are still muted on the private capex. In the near term, the big hope on the increase in public & Govt investment may disappoint as there will be big challenge in meeting the targeted fiscal deficit.
As par BG metrics and current market parameters:
(based on TTM & FWD EPS)
Current median valuation of L&T may be around : 1080 (FY:15/TTM)
Projected fair valuations might be around: 970-1085-1140 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| LT | 50.25 | 439.15 | 18 | 1149.61 | 1005.86 | 1077.73 | 1461.15 | 1118.57 |
| LT | 40.75 | 483.15 | 18 | 1035.26 | 905.80 | 970.53 | 1461.15 | 1118.57 |
| LT | 50.95 | 531.25 | 18 | 1157.59 | 1012.84 | 1085.22 | 1461.15 | 1118.57 |
| LT | 56.25 | 585.35 | 18 | 1216.31 | 1064.21 | 1140.26 | 1461.15 | 1118.57 |
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