L&T Ltd - 3QFY12 Review: Numbers good on face value, deteriorate in quality? - Karvy Stock Broking

(LT IN; NOT RATED; MktCap US$15.3bn; CMP Rs 1,273)

LT 3QFY12 Net revenue, EBIDTA & Net profit grew 23%, 10% & 18% respectively YoY

EBIDTA margins contracted by 117bps owing to surge in SGA due to forex MTM provisions & higher employee cost on account of compensation restructuring.

Net profits growth of 18% was higher than EBIDTA growth. Whilst higher depreciation (41% YoY growth) impacted negatively, lower interest cost ( 14% YoY increase), higher other income (79% growth YoY) & lower taxes (14% YoY increase) helped diluting this negative impact

Whilst the Revenue and Net profits was ahead of street estimate. Margins pressure may continue for the full year. LT guided for a stable margin outlook for FY12 with a 75-100bps drop in EBIDTA margins for FY12E.

5% growth in new order intake looks optimistic – we expect 10% de-growth YoY

With good part of FY12E ( 9MFY12) L&T will have to get new orders worth Rs324bn during 4QFY12 to meet the 5% order intake guidance of Rs766bn for FY12 ( 9MFY12 order intake has been Rs440bn) . Looking at the current run-rate ( Rs170bn) we expect a 10% de-growth in the new order intake YoY. The management cited that the macro-environment continues to be challenging with slow down in corporate capex and uncertainty around financial closure. Infrastructure segment continues to be the major driver of the order book. Current state of affairs in the power sector, shipping, ports & corporate capex segments doesn't provide visibility going into FY13E

Revenue growth guidance at 25% YoY; looks challenging

LT maintained revenue growth guidance of 25% for FY12E. Our primary data checks suggest that FY12E would be a difficult year for the sector and most of the listed and private construction players have guided for 10-20% growth for FY12. LT may get impacted due to some of the slow moving orders (10-15%) taken into account while given 25% revenue growth guidance during FY12. We believe achieving the revenue growth guidance may be an uphill task for the company.

Forex MTM losses impacted the EBIDTA margins, though positively aided by lower normalized SGA provisioning

LT booked Rs4bn forex MTM notional loss in SGA (other expenses) vs Rs500mn MTM loss during 3QFY11. LT reported Rs5bn SGA during 3QFY11, including Rs4bn of forex MTM losses this number for 3QFY12 would have been Rs9bn (vs Rs7.4bn reported during 3QFY12) resulting in 8.5% EBIDTA margins. Thanks to lower provisioning in normalized SGA by Rs1.6bn the reported EBIDTA margins were better at 9.6%. Management cited that lower SGA was on account of reduced provisions for (i) doubtful debt (ii) warranties (iii) deferred sales (iv)foreseeable losses due to cost overruns etc. LT has a loan funds of Rs95bn of which 75% is forex loans and largely utilized in standalone EPC business.

Other income was higher at 79%; has high component of subsidiary dividend

LT other income grew 79% YoY on account of large dividend payout from the subsidiaries (i) L&T Infotech (ii) L&T Infocity, Rs2.2bn vs Rs500mn during 3QFY11. Management cited that L&T Infocity had huge cash surplus hence they distributed a large dividend during the quarter. We expect similar payout during 4QFY12. Adjusted for this high payout the Net Profit would have been lower at Rs8.7bn.

The combined effect of Normalized SGA and Normalized other income would have resulted in Net Profit of Rs7.6bn vs reported Rs9.9bn.

Working capital deteriorates, DSO may increase by 10 days , NWC may range between 13-15%

LT reported negative cash flows from operations on account of increase in NWC, management expect that this may turn positive during 4QFY12 as NWC stabilizes in 13-15% of sales range. LT is facing deterioration in customer advance and increase in client retention money during the defect liability period.

Our view

LT share prices has appreciated 30% over last one month (outperforming BSE Sensex by 20%). Whilst on the face of it the results look good (beating street estimate), on a normalized basis it has been a weak operating performance. Further negative surprises on order intake over rest of 4QFY12, high likely hood of weak FY13E guidance and further deterioration in NWC, may remain a key overhang on the stock & narrow down this outperformance. We expect the consensus to lower the growth forecast over FY13E with a downward bias for rest of FY12E resulting in further stock de-rating.

Source : Equity Bulls

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