>LARSEN TOUBRO: Strong Q1 orders; sustainability a key concern

L&T has announced orders worth INR157bn in 1QFY13 so far (excluding an order from Sadara Chemical Company, Saudi Arabia, for which the order value has not been disclosed). Historically, disclosed order proportion has been 60-80% of a total quarter’s inflows, and thus the company could potentially end 1QFY13 with INR200-250bn worth of overall inflows. The risk, though, remains that the share of disclosed orders in 1QFY13 is higher than in prior quarters. Nevertheless, even with L&T ending up in excess of INR160bn for 1QFY13 inflows, it would be seen positively by the markets in our view. In the recent past, 1QFY13 orders have been ~23-24% of reported full-year inflows for the company; however, this year, we believe, 1QFY13 has witnessed higher order activity due to a carry-over of orders delayed from the previous year. As such, the adjusted full-year run-rate seems to be between INR670-800bn, which is higher than our current FY13 estimate of INR694bn.


Over the past few quarters and especially in 1QFY13, we note that order inflow has been primarily driven by sectors such as building and factories, roads and power T&D.



We also highlight a chartbook on IIP data, cement dispatch numbers and their correlation with L&T in the past. While we note a very strong correlation between cement dispatch volumes and L&T order inflow (both y-y growth trends), L&T’s inflows relate only modestly to the IIP data. We also map L&T’s valuation, with IIP data and 10-year G-sec bond yield, and find a strong correlation with bond yield rather than IIP data, suggesting that any upcoming rate cut might potentially lead to compression in valuation multiples; this follows from our strategist’s arguments that cut in interest rates may not be a panacea for falling IIP and, consequently, order inflow. Below we highlight two phases where interest rates were falling but it was accompanied by a fall in growth rates (please refer to Fig. 1). Also, historical evidence suggests that falling rates, by themselves, are neither necessary nor sufficient for market/L&T rerating.


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