>LARSEN TOUBRO LTD

 The L&T stock has outperformed the market since our previous update (BUY at Rs.1160 ). As compared to gain of 3.9% for the Sensex, the L&T stock has gained 18% in the same period.


 Stock performance would be contingent on news-flow on large order wins, commodity price trends and general economic and policy data points (interest rate cuts and mining and power sector reforms), we
opine. We note that the picture has been mixed so far with the company winning few large orders but on the policy and interest rate front, there has been disappointment.


 In view of the stock upmove, we revise rating to REDUCE. Economic growth has continued to weaken and absence of appropriate policy response is affecting investment sentiment in the infrastructure sector.


Business outlook
Project investment scenario continues remains lackluster in May During May 2012, fresh project investment was down by 42% compared to the investment intentions announced in April 2012. A total of 606 start-ups were announced during the month with a cumulative investment of Rs377.5 bn while in April 2012, there were 665 new start-ups worth Rs 534 bn. Fall in the investment during the month can be attributed to absence of Mega projects and a decline in private sector capex. Fresh project expenditure in FY12 dropped by 40% over FY11.



Material uptick in outlook is awaited. Roads being an exception Roads
Recently Prime Minister had reviewed the targets for key infrastructure segment such as road. Target for road sector awards has been enhanced to 9500 km for fiscal 2013 from an earlier target of 8800 km spread across 7300 km from NHAI and 1500 km from state agencies. During FY12, NHAI awarded 7957 km of road projects comprising of 6491 km from NHAI and 1466 km from state agencies. Expected order inflow from state agencies is likely to remain same during FY13. This coupled with enhanced target for road sector awards from NHAI is likely to open up huge opportunities for companies having expertise in road BOT segment.



Nuclear Power
Newspaper reports indicate that the Jaitapur Nuclear Power Project may be implemented after ensuring all necessary safeguard measures. This project consists of six units of 1650 MW unit size and is jointly developed with Areva of France, NPCIL and L&T. The company has not taken this order possibility in its guidance.


Power
The ordering activity in the sector remains morose with few projects coming up for tendering. Recently, RRUVNL has invited bids for 2x660 MW supercritical technology based thermal power project at Chhabra. This project had been tendered earlier in 2010 in which BHEL had emerged as the L1 bidder. However, after delays of several months, the project was scrapped and now re-tendering has been initiated. L&T had not participated in the earlier round as the contractual terms were not remunerative. It remains to be seen if L&T participates in the second round of tendering.


Defence
A consortium of L&T, Tata Power and HCL have emerged as one of the two contenders for Rs.100 bn tactical communication system order for the Indian defence industry.


Recent order wins boosted by a large road project bagged by the company's infrastructure development subsidiary.
As has been the trend in previous quarters, most order announcements in the first quarter have been from the Roads and Building and Construction segment. Majorly among them, L&T IDPL emerged as the successful project bidder to develop two contiguous road projects of length 484 km 4 lane road at a cost of approximately Rs 48 bn. The construction period of the two projects is 30 months. There are reports that the L&T plans to raise upto $400-500 mn in its subsidiary L&T, IDPL.



New investments remain largely unutilized
 The forgings facility has received a setback following diminishing interest among countries to set up Nuclear Power Plants. The company now plans to offer its forgings for the Hydrocarbon, Power and Shipping business.


 On the Shipyard front, the company has not had major order win due to poor outlook for the shipping sector. The company expects to win couple of Submarine/Defence vessel orders in FY13. There are unconfirmed reports about Mitsubishi Heavy Industries taking a part stake in the shipyard venture.



Order intake guidance of 15% order intake in FY13
 Order inflows for Q4FY12 came in at Rs 212 bn, down 30% yoy. For FY12, order intake was lower by 11% to Rs 706 bn. The company cited continued deferrals in projects as the prime reason for sluggish order intake.
 The company gave a guidance of 15% growth in order intake in FY13. While conceding that estimating order wins is an inherently tricky business in India, the management indicated that guidance is based on the premise that large-scale project deferrals do not continue in FY13.
 The company is counting on couple of large projects of the size of Rs 120-150 bn, which got spilled over from FY12. Apart from this, hydrocarbons segment is also vibrant in the domestic and international market. The company also expects to win couple of Supercritical power project orders in the current fiscal.
 The company is targeting a higher pie of the hydrocarbon business from new geographies
in the Middle East especially Saudi Arabia.


Stock outlook
 The L&T stock has outperformed the market since our previous update (BUY at Rs.1160). As compared to gain of 3.9% for the Sensex, the L&T stock has gained 18% in the same period.
 Stock performance would be contingent on newsflow on large order wins, commodity price trends and general economic and policy datapoints (interest rate cuts and mining and power sector reforms), we opine. We note that the picture has been mixed so far with the company winning few large orders but on the policy and interest rate front, there has been disappointment.
 We maintain our FY13 profit estimates and target price. In view of stock outperformance, we downgrade the stock to REDUCE.
 It is possible that in the near-term the shipyard and forgings business may report losses on account of low volume of project work.




RISH TRADER