L&T: Well-timed equity issue

Larsen and Toubro (L&T) has managed to mop up money from the capital market at an attractive price, so a dilution in the company’s equity base should not matter. The $400 million qualified institutional placement (QIP) has been priced at Rs1,660, a good price to have picked up equity. With interest rates expected to move up, albeit gradually, the QIP together with FCCB issue for an amount of $200 million will come in handy.

After a lull in the March quarter, orders have picked up and the engineering and construction (E&C) major has seen orders worth Rs 11,000 crore flow in during the past few months, with wins from both the public and private sectors. The bulk of the orders seem to be flowing in from the oil and gas, power and road sectors and given the government’s focus on infrastructure, there should be more to come.

As such, new orders are likely to increase about 20 per cent in the current year over 2008-09. Order inflows in the June 2009 quarter, at Rs 9,570 crore, were down 22 per cent year-on-year and adjusted for captive orders, the fall was even sharper. Nevertheless, the order backlog at the end of the quarter was close to Rs 72,000 crore, up 23 per cent year-on-year. For the September 2009 quarter, L&T should post revenues in the region of Rs 9,000 crore, a year-on-year increase of 17 per cent.

The increase in the operating and net profits can be even better at 19-20 per cent. Should these numbers materialise, the growth in revenues for 2009-10 should be higher by about 18 per cent, though the 6 per cent increase in gross sales in the June 2009 quarter to Rs 7,430 crore was disappointing. Profits too could surprise on the upside and average a compounded 18-20 per cent in 2009-2011. L&T is the best play on India’s infrastructure growth and the turnaround in the capital expenditure cycle. Though at Rs 1650, the stock trades at close to 21.5 times the 2010-11 estimated earnings and is not cheap.