Companies & Sectors
L&T order inflow guidance seems achievable, says Nomura
Nomura is slightly sceptical on execution timelines of Larsen & Toubro for some of its orders, as demand for imported LNG remains uncertain, and plans for most companies are still fluid
Nomura’s analysts met with Larsen & Toubro’s (L&T) management recently and found that the order inflow pipeline which the company has chalked out for FY14 is mostly achievable. L&T had guided for a 20% order growth in FY14, which works out to Rs1.05 trillion. As per the brokerage’s discussion with the company management, incremental orders in FY14 is likely to be driven by Hydrocarbon and Transport Infra segments, while the rest of the verticals are likely to remain flat y-o-y. This is in sync with the view that buildings & factories as a segment that had been driving growth for the company for the past two years is now slowing and incremental order growth is likely to be very difficult.
Execution timelines, though, remains a key concern on some of the orders booked in the recent quarters, especially from the buildings & factories segment as well as in the upcoming pipeline of projects in the hydrocarbon space, said Nomura Equity Research in its Quick Note. 
However, not withstanding our medium-term concerns about orders/ margins/ execution, the brokerage believes that L&T remains among the best potential recovery plays in the sector in India. With the stock trading inexpensively at around 13.1x adj. FY15F EPS of Rs77.1, and lack of choice in the sector, it maintains a Neutral rating on the stock.
Key takeaways from Nomura’s meeting with the L&T are as follows:
In the Hydrocarbon segment, L&T expects a doubling of order inflows to the tune of Rs150 billion in FY14F from Rs75 billion in FY13. In the domestic market, the company is targeting new order opportunities from: 1) fertilisers plants; 2) LNG re-gasification plants and 3) refinery orders.
According to the company, post the announcement of the New Urea Policy, some of the fertilisers companies are tendering in anticipation of gas allocation by Indian government. For the fertilisers plant, L&T is capable of executing full EPC contract on a turnkey basis through technological tie-ups with respective partners. Similarly, with LNG terminals, the company has tied up with various international players and will be bidding in consortium for any orders.
Nomura is slightly sceptical on execution timelines for some of these orders as demand for imported LNG remains uncertain and plans for most companies are still fluid. Similarly, while there has been general excitement over New Urea Policy related fertiliser capex, most customers are awaiting clarity on gas supply commitment/tie ups. Even if ordering does happen from these segments, execution timelines will be stretched and likely to extend up to 4-5 years, opines Nomura.
In the Middle East, L&T is aiming for orders valued less than $500mn from midstream/downstream projects. L&T is not qualified to bid for complete refinery projects, which goes anywhere between $2 billion and $3 billion, thus it targets refinery packages orders which are typically $300-$400mn in size. These orders are bagged directly from the customers while bidding as one of the consortium partners. In the offshore segment, the management noted that it has not bid for any large orders in the Middle East markets.
Apart from Hydrocarbon, L&T is bullish on the transport infrastructure segment where too it expects to nearly double its order inflow in FY14F. The order inflow should be driven by Dedicated Freight Corridor project in India and other road & metro projects in international markets.
Specifically in the road sector in India, as a strategy, L&T mentioned that it will not be bidding for BOT projects, though it might look for opportunities in the EPC projects that might come up from the National Highway Authority of India (NHAI). As per L&T, 1-2 projects of more than 400 Km are on the anvil and if they are sufficiently complex for L&T to execute (thus implying better margins) than L&T will take them up for bidding. 
In the international markets, L&T has already been successful in road projects this year as it is already L1 in three packages of Batinah expressway and another road project in Abu Dhabi for a total of Rs70 billion. In addition, L&T is also targeting road interchange packages in the Middle East with each such project potentially valued around $100 million.
In India, orders from metro rail projects, railways track refurbishment, rail sidings projects is likely to grow at steady rate in coming years. Specifically for DFC (dedicated freight corridor), the second package of Western DFC is likely to be awarded in FY14F. Similar to the first package of western DFC, there are only two consortiums (including L&T’s) that are qualified for the second package. For the third package, Marubeni-Tata Projects- KEC International – IVRCL Infra-Simplex-Gammon consortium has been added to the list of qualified bidders (totally, three consortiums are qualified to bid). L&T expects a third package to be awarded only next year.
In international metro projects, the company is targeting opportunities in the Etihad Rail project ($11 billion) and Riyadh metro project ($8 billion). Apart from this, in the Middle East, around 4-5 airports orders are likely to come up for bidding, which L&T will be targeting.
In the urban infra, after recording a robust growth in the last two years, growth is expected to remain largely flat this year. This is in line with Nomura’s view, as it expects order inflow of Rs235 billion in FY14F from this segment.
This apart, the management expects orders from the water segment to be likely flat y-o-y. The company though sees large potential over the next 3-4 years in this segment due to water management infrastructure lagging urban growth.
L&T expects flat order inflow from the both coal and non-coal power segments, as the sector is plagued by delays in land and fuel availabilities. Even T&D orders from domestic as well as international orders are expected to remain flat y-o-y.
The management does not expect any pick-up in process orders due to uncertainty over capex plans of major metal players. Again, order inflow is expected to remain flat y-o-y.
Margins and working capital
On the back of write-back of provisions, the company’s headline SG&A expense has declined in FY13 and has been more or less stagnant over the past few years. However, adjusting for these write-backs, SG&A expense has grown in the range of 10%-15%, as per the company and will continue to grow at similar rate going forward.
As the total no. of project sites continues to increase for the company (due to incremental orders being smaller in size), L&T has been adding its workforce at a rate of c.5,000/ year (no of employees in standalone entity as of Mar-13 is approx 55,000). Nomura estimates the company’s personnel expense to grow 15% in FY14F/FY15F which is more or less in line with management’s commentary.
On working capital, L&T expects net segmental working capital to be in the range of 15% to 20% of sales in FY14F versus 16% in FY13.


Sensex, Nifty precariously poised: Wednesday Closing Report

If the Nifty breaks the level of 5,775, it may head sharply down

The market closed near the lows of the day on concerns that quarterly earnings from corporates would come in below expectations. If the Nifty breaks the level of 5,775, it may head sharply down. The National Stock Exchange (NSE) recorded a volume of 51.42 crore shares and advance-decline ratio of 577:740.


The Indian market opened in the positive on supportive global cues. Most markets in Asia were higher in morning trade, but weak trade data from China capped the gains. The US markets closed in the green on Tuesday in anticipation of better earnings reports from corporates.


The Nifty opened 11 points up at 5,870 and the Sensex started the day at 19,483, a gain of 44 points over its previous close.  Buying in consumer durables, realty, banking and power sectors soon lifted the indices to their day’s highs. The Nifty touched 5,879 and the Sensex rose to 19,506 at their respective highs.


Meanwhile, the International Monetary Fund (IMF) on Tuesday marginally scaled down India's growth rate projections to 5.6% for the current fiscal and 6.3% for the next financial year. This was slightly lower by 0.2% and 0.1%, respectively, than the previous forecast released by the IMF in its report in April.


Profit taking in metal, auto, refinery and realty sectors amid choppy trade saw the indices paring their gains and remaining range-bound near their previous closing levels in morning trade.


Sporadic buying saw the indices emerge in the positive terrain in noon trade. However, the gains were short-lived as the market slipped into the red in the post-noon session on pressure from oil & gas and auto stocks and concerns about first quarter earnings from corporates.


The benchmarks touched their lows at around 2.30pm with the Nifty falling to 5,803 and the Sensex slipping to 19,238. The market settled near the lows as the key European indices pared opening gains and selling in oil & gas, realty and auto sectors.


The Nifty settled 42 points (0.72%) lower at 5,817 and the Sensex ended at 19,294, down 145 points (0.75%).


The broader indices also settled lower today, as the BSE Mid-cap index declined 0.40% and the BSE Small-cap index slipped 0.04%.


BSE Consumer Durables (up 1.95%); BSE IT (up 0.66%); BSE TECk (up 0.27%) and BSE Healthcare (up 0.11%) were the sectoral gainers today. The top losers were BSE Oil & Gas (down 1.82%); BSE Auto (down 1.50%); BSE Realty (down 1.32%); BSE PSU (down 1.02%) and BSE Capital Goods (down 0.98%).


Out of the 30 stocks on the Sensex, eight stocks settled higher. The gainers were Wipro (up 1.33%); Tata Power (up 0.88%); Jindal Steel & Power (up 0.74%); TCS (up 0.60%) and ICICI Bank (up 0.34%). The main losers were Mahindra & Mahindra (down 2.63%); Hindalco Industries (down 2.58%); Bajaj Auto (down 2.13%); Tata Steel (down 1.97%) and Reliance Industries (down 1.95%).


The top two A Group gainers on the BSE were—Emami (up 5.49%) and Wockhardt (up 5.12%).

The top two A Group losers on the BSE were— Strides Arcolab (down 8.09%) and GlaxoSmithKline Consumer Healthcare (down 5.19%).


The top two B Group gainers on the BSE were—Dolat Investments (up 20%) and Asian Hotels West (up 19.94%)

The top two B Group losers on the BSE were—Agro Dutch Industries (down 18.85%) and Sancia Global Projects (down 18.69%).


Of the 50 stocks on the Nifty, 13 ended in the in the green. The major gainers were Lupin (up 2.87%); HCL Technologies (up 2.28%); UltraTech Cement Co (up 1.64%); NMDC (up 1.26%) and Tata Power (up 1.23%. The key losers were Hindalco Ind (down 3.12%); BPCL (down 3.07%); Bank of Baroda (down 3.05%); M&M (down 2.79%) and Cairn India (down 2.46%).


Markets across Asia, with the exception of Japan and South Korea, closed higher on speculations that the Chinese government might announce some new measures to boost growth on the back of falling exports. Chinese exports fell 3.1% in June from a year earlier, the first decline since January 2012. Meanwhile, imports also were 0.7% lower, lower than expectations for an 8% gain.


The Shanghai Composite jumped 2.17%; the Hang Seng surged 1.07%; the Jakarta Composite climbed 1.70%; the KLSE Composite rose 0.13%; the Straits Times gained 0.30% and the Taiwan Weighted advanced 0.51%. Among the losers, the Nikkei 225 declined 0.39% and the Seoul Composite lost 0.34%.


At the time of writing, the key European markets were down between 0.27% and .56% and the US stock futures were marginally in the red ahead of the minutes of the release of the FOMC June meeting.


Back home, institutional investors—foreign as well as domestic—were net buyers in the equities segment on Tuesday. While FIIs bought shares totalling Rs165.61 crore, DIIs invested Rs37.83 crore.


The indefinite strike by employees of Neyveli Lignite Corporation (NLC) against the Centre's move to divest 5% of its stake in the PSU entered the eighth day today. About 30,000 workers, including 13,000 contract employees, are on the strike since July demanding that the government withdraw its decision to sell its stake as part of disinvestment process. The stock rose 0.17% to Rs58.65 on the NSE.


Sterlite Technologies has entered into a 50:50 joint venture agreement with Conduspar Condutores Eletricos Limitada (Conduspar), to build a greenfield facility in Curitiba in Parana state (Brazil) to produce optical fibre cables for the Latin American markets. The joint venture is expected to start commercial production by the first quarter of fiscal 2015. Sterlite Tech gained 4.29% to settle at Rs23.10 on the NSE.


Tide Water Oil Co (India), now the owner of global rights for the lube brand Veedol, has set up subsidiary in the Netherlands—Veedol International BV—to re-launch the branded products in Europe. Tide Water, which earlier only had the rights to the iconic brand for India, acquired Veedol International, UK, from BP Plc in October 2011 along with the brand rights, its logos and sub brands in 126 countries. The stock gained 0.92% to close at Rs7,220 on the NSE.


Q1 preview: OMCs may bleed again, says Nomura

Nomura is positive on RIL and Cairn. Among oil PSUs, it believes that upstream PSUs are vulnerable to higher subsidy share

With a sharp decline in oil prices and continued monthly diesel price hikes, Nomura Equity Research estimates first quarter (1Q) under-recoveries (U/Rs) to decline 27% q-o-q at Rs263 billion. While upstream companies are demanding a lower subsidy share (currently billing at same $56 per barrel as last year), the brokerage believes it is unlikely a decision will be made soon. This may lead to a sharp decline in net realisations for ONGC and Oil India (OIL).



Nomura estimates nearly flat gas transmission volumes for GAIL & GSPL. It expects Petronet LNG’s (PLNG) utilisation to improve sequentially to near 100%, but well below earlier highs of 110%-114%. For Indraprastha Gas (IGL), volume growth is likely to recover but EBITDA/scm could moderate due to an increasing share of LNG and weaker currency. The brokerage expects Gujarat Gas (GGAS) to report good results, as it should benefit from price hikes and softer LNG prices, believes Nomura.

Nomura estimates Reliance Industries’ (RIL) PAT at Rs52.2 billion (up 18% y-o-y, but down 7% q-o-q), with the sequential decline driven by weaker refining margin ($8.5/bbl, down 16% q-o-q) and a further decline in E&P EBIT. For Cairn India, the brokerage estimates a 9% q-o-q drop in EBITDA due to lower oil realisation, but the bottomline would likely be boosted by forex gains.



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