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Friday, January 13, 2012

Larsen & Toubro : Grab Great Business at Great Price !!!


Scrip Code: 500510 LT

CMP:  Rs. 1131.80; Buy at current levels & on Dips.
Short term Target: Rs. 1155, 6 month Target – Rs. 1400; STOP LOSS – Rs. 1040;  Market Cap : Rs.  69,171.21 Cr; 52 Week High / Low: Rs. 2001.70 / Rs. 969.15
Total Shares: 61,11,61,097 shares; Promoters : 26,18,94,131 shares –42.85 %; Total Public holding : 34,92,66,966 shares – 57.15 %; Book Value: Rs. 351.07; Face Value: Rs. 2.00; EPS: Rs. 66.62; Div: 725.00 % ; P/E: 16.98 times; Ind. P/E: 12.81; EV/EBITDA: 10.55.
Total Debt: 7,161.11 Cr; Enterprise Value: Rs. 77,282.67 Cr.

LARSEN & TOUBRO LTD: LARSEN & TOUBRO LTD was founded in 1938. Larsen & Toubro Limited operates as a technology, engineering, construction, and manufacturing company worldwide. Larsen’s divisions include Engineering and Construction Projects (E&C), Heavy Engineering (HED), Engineering Construction and Contracts (ECC), Electrical and Electronics (EBG), Machinery and Industrial Products (MIPD), and Information Technology & Engineering Services. These divisions undertake engineering design and construction of infrastructure and industrial projects, including civil, mechanical, and electrical & instrumentation engineering. The customer profile includes names, such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, and Goodyear. The Heavy Engineering (HED) division manufactures and supplies custom designed and engineered critical equipment and systems to the needs of core-sector industries and the defense sector. It is the preferred supplier of equipment for a select range of products, globally. The Division has entered into Shipbuilding business and engages in construction of specialty commercial vessels and warships for the navy, as well as the coast guard.  The Engineering Construction and Contracts (ECC) division delivers engineering, procurement, and contract solutions in the oil and gas, petrochemicals, power, and water space industries. The Electrical and Electronics (EBG) division offers solutions in low & medium voltage categories. Its businesses consists of switchgear, switchboards for different applications, including marine, meters, automation systems, petroleum dispensing pumps, medical equipment and tooling solutions and has operations at different locations in India (two in Mumbai and one each in Ahmednagar, Mysore, Faridabad and Coimbatore) and one unit for manufacturing operations in China. The Information Technology and Engineering Services Information and Technology Services division offers e-Engineering solutions, including product design and engineering analysis, engineering process support, production and plant engineering, asset information management, and design automation to high end technology verticals, such as automotive, aerospace, marine and ship design, plant engineering, and industrial products. This division also provides embedded systems and solutions comprising supply of hardware, application software, and enclosure design for electronics product design and development in automotive, medical, semiconductor, and industrial products. On November 30, 2009, Nuclear Power Corporation Of India Limited and Larsen & Toubro Ltd. announced the formation of a joint venture company to produce special steels and ultra heavy forgings. On January 22, 2010, Larsen & Toubro Ltd. formed a joint venture with Sapuracrest Petroleum Bhd to undertake installation of pipelines and construction of offshore rigs and platforms in India, West Asia and South East Asia. L&T does business in Malaysia, the United States, the Unite Kingdom, Brazil, Saudi Arabia, the United Arab Emirates, Qatar, Bangladesh, and Sri Lanka. L& T LTD is compared globally with Ssangyong Engineering & Construction, Aker Solutions ASA and JTEKT Corporation.

Investment Rationale:
Larsen & Toubro’s (L&T) construction arm has bagged various orders aggregating to Rs. 1,000 cr in 3QFY2012. In the buildings and factories segment, the company has secured a Rs. 200 cr order from GMR Group for the construction of an air traffic control tower and associated works at Delhi International Airport. In the power Transmission & Distribution segment, the company has obtained new orders adding up to Rs. 334 cr from reputed clients for the construction of transmission lines and substations across India. An international order valued at Rs. 185 cr has been secured in Kuwait for the construction of a substation and associated overhead transmission line works. Orders valued at Rs. 282 cr were secured from Greater Mohali Area Development Authority for the construction of utility facilities such as water supply network, waste-water collection network, storm water network, road works, electrical works and other associated development works in Aerocity, Mohali. With these orders in hand, the company’s outstanding order book stands at whopping Rs. 1,50,553cr (3.4x FY2011 revenue), which provides good revenue visibility. This order booking takes the company’s total declared orders to Rs. 8,364 cr until now in this quarter against orders received worth Rs. 13,336cr in 3QFY2011. The drying up of order inflows is one of the major concerns for the stock and has led to underperformance in the recent past. L&T retained its revenue growth guidance at 2 5% for FY12E on the back of a robust order backlog and stable execution therefore giving optimistic assumption with higher probability of downward revision in ensuing quarters. However it sharply revised down guidance for EBITDA margins and order inflows; it is expected that EBITDA margins could decline by 0.75 % -1.25 %; there could be change in revenue mix and sharp increase in raw material prices. It is expected that growth in order flows could be muted by 5 % against 15 % – in view of 11 % yoy decline in H1FY12, This sector see no signs of revival in investment spends and continued postponements in order finalizations, but as said earlier that LARSEN & TOUBRO has an order book at whopping Rs. 1,50,553cr its is easily possible for L&T to bring its revenue on track as L&T is in better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities

Outlook and Valuation:
I initiate my coverage on L&T with Buy, on the back of its robust core businesses, infrastructure opportunities and potential for value unlocking in its subsidiaries. Core business would drive earnings, as it has robust order book and good revenue visibility. Subsidiaries like IT Services, and Infra would be valuation triggers. The infra-led growth would also be backed by growing portfolio and geographical reach via JVs & acquisitions giving good revenue visibility. L&T has underperformed BSE Sensex and being in trading range from Rs. 970 – Rs. 1100, owing to factors such as slowing order inflows and rising competition (especially in the BTG equipment segment), leading to fears of slippage on order inflow guidance. Also, L&T lost the public sector shipyard, Mazagon dock, for defense and naval ships and failed to win the recent ONGC pipeline tenders. It is believed that though L&T would find it difficult to meet its revised guidance for FY2012 (growth of 5 % in order inflow and 25 % in revenue), but still it is better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities. On the valuation front, due to the recent correction in prices, the stock is trading at PE of 14.85x and 12.63 for FY2012E and FY2013E earnings respectively, adjusted for subsidiary value, which is lower than its historical PE of 15-20x gives an excellent opportunity to grab such a fantastic business at such a low price & Hence, any further price correction provides a good opportunity to accumulate. Larsen & Toubro to declare its Q3 results ended 31st Dec 2011 on 23rd Jan 2012.

KEY FINANCIALS FY10 FY11 FY12E FY13E
SALES (Rs. Crs) 43,698.90 52,099.10 61,061.50 67,581.40
NET PROFIT (Rs. Crs) 3,374.50 4,179.00 4,566.20 5,269.20
EPS (Rs.) 56.20 68.90 76.20 89.60
PE (x) 23.80 19.40 17.50 14.90
P/BV (x) 3.80 3.30 2.80 2.40
EV/EBITDA (x) 14.00 12.10 11.70 10.40
ROE (%) 19.30 18.20 17.30 17.60
ROCE (%) 15.60 14.30 12.90 13.10

I would buy LARSEN & TOUBRO LTD with a price target of Rs. 1400 for Medium to Long term and Rs. 1155 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1040 on every purchase.


READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

Tuesday, January 3, 2012

Ashok Leyland : Accumulate on every dip.Good stock !!!

ON 5 Jan 2012

Scrip Code: 500477 ASHOKLEY
CMP:  Rs. 22.60; Buy at Rs. 22.20 levels.
Short term Target: Rs. 24; Medium to Long Target – Rs.30; STOP LOSS – Rs.20.50; Market Cap: Rs. 6,013.13 cr; 52 Week High/Low: Rs. 34.38 / Rs. 20.00
Total Shares: 266,06,76,634 shares; Promoters : 102,72,37,424 shares –38.61 %; Total Public holding : 163,34,39,210 shares – 61.39 %; Book Value: Rs. 9.99; Face Value: Rs. 1.00; EPS: Rs. 2.19; Div: 200 % ; P/E: 10.31 times; Ind. P/E: 25.95; EV/EBITDA: 6.92. Total Debt: 2658.19 Cr; Enterprise Value: Rs. 8711.05 Cr.

ASHOK LEYLAND LTD: The Company was founded in 1948 and is based in Chennai, India. Ashok Leyland limited is a subsidiary of Hinduja Automotive Ltd. It was named after the founder Raghunandan Saran’s son Ashok, the company was renamed ‘ASHOK LEYLAND’ with equity participation from Leyland Motors Ltd in 1955. Ashok Leyland ltd engages in the manufacture and sale of commercial vehicles and related components in India and internationally. In the year 1967, India’s first inland made double decker was launched by Ashok Leyland. The Company's products include Buses – double decker and vestibule buses, CNG buses, Trucks – including multi axle trucks & tractor trailers, diesel engines, defense and special vehicles for Indian army. From 18 seater to 82 seater double-decker buses, from 7.5 ton to 49 ton in haulage vehicles, from numerous special application vehicles to diesel engines for industrial, marine and genset applications, Ashok Leyland offers a range of products. In the year 2006 Ashok Leyland acquired AVIA the Czech Republic based truck manufacturer. In 2007 the company formed a JV with Nissan Motor Company, Japan for the manufacture and marketing of light commercial vehicles, same year Ashok Leyland signed another JV with Continental AG, Germany – for the development of automotive Infotronics. In 2010, the Company acquired 26% stake in Optare plc. a bus manufacturer in the United Kingdom. Ashok Leyland Ltd is compared to: Bajaj Auto Limited, Motherson Sumi Systems Limited in India and Xiamen King Long Motor Company Limited globally.

Investment Rationale:
Management expects industry to grow at a moderate rate of 5 % - 6 % in FY12. Higher interest rates, rising fuel prices and sluggish freight rates in Southeast are likely to impact sentiments negatively. Higher tonnage tipper segment is witnessing strong demand with about 50 % YoY growth in H1FY12 largely driven by construction activities. Regional wise sales increased by 112 % in west, 42 % in South, 15 % in North and decline in East. Company’s strength in Tipper segment was affected due to supply constraints of fully built vehicles. Management expects to maintain its market share of 25 % in FY12 driven by penetration in northern and eastern markets. To achieve this Ashok Leyland is increasing dealerships and service stations, increasing production of fully built vehicles (FBV) and necessary price corrections (for select products). It aims to do 3500 units of FBV as of 2000 to 2500 units per month currently. Implementation of ban on overloading has been gaining momentum in Uttar Pradesh, Madhya Pradesh, Bihar and now in Karnataka also. Ashok Leyland has started dispatching its LCV ‘Dost” under Nissan JV with volumes of 210 units in October. During November domestic prices were increased upto 1 %. Internationally prices of metals like Aluminum & Copper are witnessing marginal reduction which is partly offset by unfavorable exchange rate. Management expects benefits in second half of FY12 and maintains EBITDA margins of 10.5 % for FY12. Management targets 9,000 units of manufactured engine sales in H2FY12. Spare parts sales were at Rs. 370 Cr in H1 and management targets Rs. 400 Cr in H2FY12. Ashok Leylands JV with John Deere is expected to launch its first product named Backhoe loader followed by wheel loader in FY13, with the target volumes of 8,000 to 9,000 units. Ashok Leylands Continental JV has started supplying dashboard electronic equipment which is to be fitted in UTruck platform. Management expects major of its JVs to turn EBITDA positive in the next 2 to 3 years. U-Truck has been launched in tractor-trailer and tipper segments only - with the volumes of 2,000 units in H1FY12 and targets its volumes of 6,000 by H2FY12.  Loans & Advances are up by Rs 310 Cr largely due to VAT accumulation of Rs. 46 Cr and excise of Rs. 55 Cr. Also, capital advances are up by Rs. 50 Cr. Management targets to bring down Loans & Advances by Rs. 100 Cr going ahead. It is expected that Ashok Leyland will maintain exports target of 13,000 vehicles for FY12 and targets 15 % of total volumes as exports this is possible due to increased penetration in new markets of Latin America and Africa.

Outlook and Valuation:
Ashok Leyland is raising its stake in British bus maker Optare Plc to 75.1 % following a re-financing agreement.  Ashok Leyland had already acquired a 26 % stake in Optare in July 2010 aiming at a long-term strategic partnership. This re-financing was achieved with Ashok Leyland facilitating a credit-line to support Optare's re-banking options and providing a substantially improved working capital facility for the business. Optare's management believes that this re-financing represented a "defining moment" in the company's turnaround plan, which the company had commenced in 2009. Along with the access to Optare’s technology including modern range of city buses, Ashok Leyland sees a large opportunities to grow in the global bus market. Both the management sees this as an important element in their vision of being among the top 5 bus manufacturers globally. Through leveraging the synergies of the two companies, managements are confident that going forward they will be able to accelerate technology sharing, develop future-ready products and substantially increase their global footprint. Ashok Leyland has been trading in the range of Rs. 21 & Rs. 24. Keeping these in mind, Ashok Leyland could be an ideal Buy as well as at declines with a stop loss placing at Rs. 20.50 for a target of Rs. 30.00. Uncertainty with respect to demand for Ashok Leyland (due to regional disparity) continues to be a concern on the volume front. However, price hikes and lower Raw Material cost can provide cushion against the drop in earnings due to lower volumes. The company could report EPS of Rs. 2.40 x for FY12E and Rs. 3.00 for FY13 estimates. The stock could be bought with the short term target of Rs. 24 & Rs. 30 for Medium to long term period with the strict stop loss of Rs. 20.50 

KEY FINANCIALS FY10 FY11 FY12E FY13E
SALES (Rs. Crs) 7,244.70 11,117.70 12,542.70 14,274.70
NET PROFIT (Rs. Crs) 388.90 657.30 627.40 786.20
EPS (Rs.) 1.50 2.50 2.40 3.00
PE (x) 18.50 10.90 11.40 9.10
P/BV (x) 3.10 2.70 2.40 2.10
EV/EBITDA (x) 11.20 6.70 5.90 4.90
ROE (%) 17.60 26.40 22.30 24.70
ROCE (%) 12.50 18.50 17.40 19.40

I would buy ASHOK LEYLAND LTD with a price target of Rs. 24 for Short term and Rs. 30 for the Medium to long term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 20.50 on every purchase.

Sunday, January 1, 2012

New Year Wishes for Readers !!!

Every man should be born again in the first day of January. Start with a fresh page.  Take up one hole more in the buckle if necessary, or let down one, according to circumstances; but on the first of January let every man gird himself once more, with his face to the front, and take no interest in the things that were and are past.

Keep smiling, God Bless u all and Take Care !!!
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