maverick
03-12-2008, 07:02 AM
Larsen & Toubro-Prime Candidate For Shorting For nearly 11 months of CY08, analysts have backed up a handful of stocks as prime picks. These included L&T, Bhel, Punj LLoyd, HDFC and HDFC Bank but now that the relative valuations of these stocks exceed their peer group, the overvaluation is becoming apparent as are the related business risks. L&T at 17 times FY09 estimated earnings carries a near 100 per cent premium valuation, to its competitors and has to lose a lot of value maybe 30 to 40 per cent from hereon.
-L&T's current order book of Rs 63,000 crore comprises of Real Estate projects to the tune of Rs 20,000 crore spread over Chandigarh, Bombay and the Middle East-most of them are still seeking financial closure.
-L&T likely to drop plans to develop an SEZ.
-L&T also likely to drop plans to set up a Ship Building Dock.
-L&T may also drop plans to build dry docks for building Oil Rigs.
-Massive delays likely from Realty and Oil linked plants being set up in the UAE and Saudi Arabia due to a fall in price of Crude Oil.
-Balance Sheet Risk increasing substantially from L&T's funds being diverted into L&T Finance and L&T Infrastructure.
-CY09 may see further Equity dilution as L&T seeks to raise funds from shareholders to balance out its Debt: Equity structure.
-The stock does not merit a 16-17 PE based upon near term earnings when all its domestic competitors are fetching a PE of 5 to 6.
The ˇ§India Infrastructure Super-Cycleˇ¨ which started in early 2002 is showing signs of stress. The ongoing global credit crisis has reduced the quantum of credit available globally and increased the cost of the same. The sustenance of any capex cycle is dependent on plentiful availability of cheap credit.
The Indian General Elections in FY10 could be another dampener as a new party coming into power typically takes a year to settle down and a year to restart projects. Further, ordering typically slows down in the run up to elections.
L&Tˇ¦s Rs630bn order backlog, up 43% YoY, provides sales visibility for the next 1.5-2 years. Working capital requirements have gone up in a World increasingly pressed for cash.
L&T's earnings estimates have been lowered by 6-20% to factor in: Slower order inflows in FY10E and FY11E; Margin assumptions lowered by 48-85bps as a slowdown in order picking could force L&T to compromise on margins; hiked working capital requirements and effective interest costs by 200-300 bps to factor in a difficult credit environment.
Discussions with mid cap construction and infrastructure asset developers prior to the RBI CRR rate cuts suggest that the funding situation for both working capital and financial closure of projects have become tighter.
According to a study by the Associated Chambers of Commerce and Industry of India, following a strong growth in 3Q/4Q FY08 in terms of investments announcements, the domestic expansion plans saw a moderate decline of 29% in 1QFY09 in response to the continuing financial instability and uncertainty in the Indian economy.
Within three months, GCC has gone from a position of excessive credit growth (expanding loans to deposit ratios) and demand-driven inflation to one of tight liquidity and concerns over the sustainability of growth. The reversal of foreign exchange positions since April 2008 and the global banking crisis in September has driven this.
A sustained liquidity crunch obviously impacts all layers of the real estate value chain (developer purchase of land, construction working capital, offplan buyer finance and end-user mortgage finance).
Further, E&C investors and management teams often quote similar price thresholds for project profitability. Economic thresholds with "sacred cow" status in the industry include: Middle East Projects at $50-60/bbl oil, deepwater at $60-70/bbl oil, and Canadian Oil Sands at $80-90/bbl oil. Construction cost estimates are still rising even though commodity prices are now falling.
Saudi Aramco plans to sell 25% of its 62.5% stake in the Jubail refinery and petrochemical JV through an IPO (Bloomberg). The project cost was originally estimated at $6 billion, later revised to $10 billion, and Aramco has conceded the final price would exceed current estimates.
Ras Tanura refinery is delayed. Several other Aramco projects have faced delays including the Kursaniyah oilfield, and the PetroRabigh refinery and petrochemical project. Aramco and its JV partners could delay financing their refineries at Jubail and Yanbu, currently projected for year-end.
-L&T's current order book of Rs 63,000 crore comprises of Real Estate projects to the tune of Rs 20,000 crore spread over Chandigarh, Bombay and the Middle East-most of them are still seeking financial closure.
-L&T likely to drop plans to develop an SEZ.
-L&T also likely to drop plans to set up a Ship Building Dock.
-L&T may also drop plans to build dry docks for building Oil Rigs.
-Massive delays likely from Realty and Oil linked plants being set up in the UAE and Saudi Arabia due to a fall in price of Crude Oil.
-Balance Sheet Risk increasing substantially from L&T's funds being diverted into L&T Finance and L&T Infrastructure.
-CY09 may see further Equity dilution as L&T seeks to raise funds from shareholders to balance out its Debt: Equity structure.
-The stock does not merit a 16-17 PE based upon near term earnings when all its domestic competitors are fetching a PE of 5 to 6.
The ˇ§India Infrastructure Super-Cycleˇ¨ which started in early 2002 is showing signs of stress. The ongoing global credit crisis has reduced the quantum of credit available globally and increased the cost of the same. The sustenance of any capex cycle is dependent on plentiful availability of cheap credit.
The Indian General Elections in FY10 could be another dampener as a new party coming into power typically takes a year to settle down and a year to restart projects. Further, ordering typically slows down in the run up to elections.
L&Tˇ¦s Rs630bn order backlog, up 43% YoY, provides sales visibility for the next 1.5-2 years. Working capital requirements have gone up in a World increasingly pressed for cash.
L&T's earnings estimates have been lowered by 6-20% to factor in: Slower order inflows in FY10E and FY11E; Margin assumptions lowered by 48-85bps as a slowdown in order picking could force L&T to compromise on margins; hiked working capital requirements and effective interest costs by 200-300 bps to factor in a difficult credit environment.
Discussions with mid cap construction and infrastructure asset developers prior to the RBI CRR rate cuts suggest that the funding situation for both working capital and financial closure of projects have become tighter.
According to a study by the Associated Chambers of Commerce and Industry of India, following a strong growth in 3Q/4Q FY08 in terms of investments announcements, the domestic expansion plans saw a moderate decline of 29% in 1QFY09 in response to the continuing financial instability and uncertainty in the Indian economy.
Within three months, GCC has gone from a position of excessive credit growth (expanding loans to deposit ratios) and demand-driven inflation to one of tight liquidity and concerns over the sustainability of growth. The reversal of foreign exchange positions since April 2008 and the global banking crisis in September has driven this.
A sustained liquidity crunch obviously impacts all layers of the real estate value chain (developer purchase of land, construction working capital, offplan buyer finance and end-user mortgage finance).
Further, E&C investors and management teams often quote similar price thresholds for project profitability. Economic thresholds with "sacred cow" status in the industry include: Middle East Projects at $50-60/bbl oil, deepwater at $60-70/bbl oil, and Canadian Oil Sands at $80-90/bbl oil. Construction cost estimates are still rising even though commodity prices are now falling.
Saudi Aramco plans to sell 25% of its 62.5% stake in the Jubail refinery and petrochemical JV through an IPO (Bloomberg). The project cost was originally estimated at $6 billion, later revised to $10 billion, and Aramco has conceded the final price would exceed current estimates.
Ras Tanura refinery is delayed. Several other Aramco projects have faced delays including the Kursaniyah oilfield, and the PetroRabigh refinery and petrochemical project. Aramco and its JV partners could delay financing their refineries at Jubail and Yanbu, currently projected for year-end.