>LARSEN & TOUBRO (MACQUARIE RESEARCH)

Event
■ We met L&T management as part of our Oil & Gas Yatra with focus on hydrocarbon business. We also revisit scenarios where L&T’s order inflow is likely to fall short of the guidance of 30% growth as some of the large ticket orders remain undecided.

Impact
■ Order inflow pipeline reasonable, timing remains a concern: L&T is currently pursuing a number of opportunities in the hydrocarbon space from clients like ONGC (ONGC IN, Rs1100, UP, TP: Rs919 – Jal Irani), BPCL (BPCL IN, Rs542, OP, TP: Rs695 – Jal Irani), HPCL (HPCL IN, Rs344, OP, TP: Rs460 – Jal Irani), etc. There are opportunities also emerging in the Middle East. However, key project awards from ONGC continue to experience delays, which can impact order inflow targets.

■ Vertical integration has made L&T more competitive: L&T is much more comfortable regarding its competitiveness vis-à-vis Korea on account of vertical integration and capacity addition. L&T has recently added an offshore installation vehicle in JV with Sapuracrest, which had to be outsourced earlier, and created an offshore fabrication yard in Oman and fabrication yard capacity at Hazira and Powai. Moreover, competitive intensity has also reduced as some of the new entrants rethink strategy after cost overruns.

■ L&T likely to fall short of target of Rs200bn order inflow in 4QFY10: L&T needed order inflow of Rs200bn in 4QFY10 to achieve its guidance of 30% growth in FY10 while only Rs38bn of orders have been announced so far. However, the company is L1 in numerous projects while there are order inflow possibilities from oil majors, roads and power projects.

■ Couple of large orders can still swing the needle: L&T is pursuing large orders from ONGC (B-193), Oman airport order and its in-house Rajpura power project which can each add US$1bn to the order inflow.

■ Sensitivity to order inflow shortfall is limited: In case of order inflow growth of only 20% as against guidance of 30%, order backlog would fall short by only 9%. The impact on revenues and earnings over next two years would be limited to 2–6%, respectively.

Earnings and target price revision
■ No change.

Price catalyst
■ 12-month price target: Rs1,841.00 based on a Sum of Parts methodology.
■ Catalyst: execution delivery and order booking in 4QFY10

Action and recommendation
■ No long-term impact from miss in order inflows in 4QFY10: In case L&T achieves Rs150bn order inflow instead of the required Rs200bn, our view is it would look like a big miss, but the sensitivity to earnings is not much. Also, over a 12–15 month view, we remain positive on the stock as execution has bottomed out in 3QFY10, infra capex remains strong and there was pick-up in private capex in 2HCY10.

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