Larsen and Toubro (L&T) has reported a strong order inflow for Q2FY2010 led by the orders from the hydrocarbon and power sectors.
The robust order intake in the July-September quarter comes as a huge relief and allays some of the concerns expressed over the company’s ability to meet its full-year guidance of a 25-35% order intake.
Additionally, reports suggest that the company may also win another order in the range of Rs7,000 crore for a super critical technology based power plant from MahaGenco.
For Q2FY2010 we expect L&T to report a 12.4% growth in its top line on the back of a 20% growth in the engineering & construction business. The company’s operating margin is expected to improve by 70 basis points on a year-on-year (y-o-y) basis. On the back of the improved margin the net profit is expected to increase by 18.6% to Rs545.6 crore.
We have upgraded our stand-alone earnings estimate for L&T in view of the improved revenue visibility and after incorporating the numbers disclosed in its latest annual report. We now expect L&T to report a 21% compounded annual growth in its revenues on a stand-alone basis. Our stand-alone earnings estimates for FY2010 and FY2011 stand revised to Rs53.7 and Rs65.1 respectively. On a consolidated basis, our earnings per share (EPS) estimates for FY2010 and FY2011 stand at Rs67.7 and Rs80 respectively.
We have also raised our price target for L&T to Rs1,702 as we have increased our target multiple for the company’s stand-alone business to 22x FY2011E earnings (from 20x estimated earlier) on account of an improving business outlook for the company.
In the recent past L&T has once again displayed its capability to bag large prestigious orders and its recent success in the power sector is a big positive for the company. Furthermore, the outlook for the subsidiaries (L&T InfoTech and L&T Finance) is also showing signs of improvement.
Though we remain positive on L&T, the recent run-up in the stock provides a limited upside to our new price target. Hence, we maintain our HOLD rating on the stock. At the current market price the stock trades at 20.7x FY2011.