L&T: 1160-1175 May Be Very Tough Zone To Sustain For The Indian Caterpillar In The Days Ahead

Except order inflows, nearly all the other key parameters 

are virtually below street expectations in Q3FY16

Going forward, timely order execution cycle and OM will be the key   

Consecutive closing below 1110, may fall up to 1065-1040-995 in the near term

CMP: 1102

Either sell around 1110-1130 or on rise around 1160-1175;

TGT1: 1065-1040*-995-950 (1-6M)

TGT2: 898*-860-780-675 (12-24M)

TSL > 1195-1205

Note: Consecutive closing above 1195-1205 zone for any reason, L&T may rally up to 1260-1291 & 1378-1415 zone in the mid to long term under alternative bullish scenario.

Q3FY16 PAT of  L&T was up by nearly 19% (YOY) & 4% (QOQ) at around Rs.1035 cr against median expectations of Rs.1050 cr (YOY-867 & QOQ-996). Q3 PAT was largely supported by treasury gains and lower interest costs.

However, Q3 EBITDA was down by nearly 8% on YOY basis at around Rs.2650 cr and missed estimates of Rs.3082 cr. Also overall OM fell sharply by around 1.86% to 10.3% and moreover, its core division of infra & engg business saw OM dipped to 7.4% from 10% in Q3 (YOY).

Historical OM of  L&T was around 15% and along with tepid growth in net revenue, it may be a cause of great concern for the company. The management attributed to this fall in margin to project execution delays and slow order movement and warned that margin may be remain under pressure in the foreseeable future. In Q3, margin was mainly impacted by surge in employee cost (up by 25% YOY) and sales & distribution costs (up by around 35% YOY).

As par the L&T management, actual revenue and EBIT from its key infra segment grew only by 2.5% & 0.6%  (YOY) due to delay in project clearances and  payments on certain jobs. But power business revenue doubled with EBIT grew by almost 19% YOY on progress of coal & gas based projects under execution. Although there was some revenue growth in heavy engg and defence & aerospace, but at EBIT level, the same was translated into loss against YOY profit amid cost & time overruns on certain process plant & nuclear equipment jobs and under recovery on some fixed overheads. Notably, Hydrocarbon business saw some volume growth of around 23% in Q3 and EBIT improved to profit of Rs.39.3 cr against YOY loss of Rs.137.2 cr.

Q3 consolidated EPS was 11.07 against consensus of 12.68 (YOY-9.27 & QOQ-10.65).

The only silver lining was that, L&T procured fresh order of around Rs.38528 cr in Q3FY16 against expectations of around Rs.25000 cr. The Q3 order inflow was up by 11% (YOY) amid surge in infra order. At Q3, total order book size was around Rs.2.56 lakh cr up by healthy 14% YOY and within that order book, international order counts for around Rs.70000 cr (i.e. about 27%). There was international order for around Rs.11000 cr in Q3FY16.

But some analysts are adopting  cautious stance on this huge order book as ultimately timely execution of the same and management of working capital will be key for earning reflection.(which only matters.).

At the same time, L&T management is cautiously optimistic about the overall economic outlook in the near term and relying heavily on the public sector (Govt) spending to achieve its FY-16 target, but some analysts feel that may be quite tough. 

L&T management feel that domestic economy will continue to face headwinds as tight liquidity & weak global cues has kept the markets tentative (uncertain). It further feel that drastic fall in oil & commodity prices, China slowdown and significant depreciation of EM currencies against USD has contributed to a volatile economic environment and industrial & private sector capex will likely to be remain muted in the near term. 

L&T management sees some hope on improved state & central fiscal positions, moderate inflation, softer interest rates, increased allocation of plan expenditure. Also accelerated reforms and business enabling policy initiatives are expected for better investment climate in India in the days ahead.

But, having said that, 7-PC, OROP etc may drag both the central & state finances and unpaid oil & fertilizer subsidies may continue to put strain on fiscal deficits.

Clearly, L&T, the bellwether of Indian economy or the "desi Caterpillar" is not very enthusiastic about the overall domestic and also global economic outlook. 

The order flow growth guidance as indicated by L&T was around 10% in the start of FY-16, which was subsequently lowered by 7% in Q2FY16 and now again adjusted it just to the FY-15 level (Rs.1.55 lakh cr). 

But still it means that, L&T need to get fresh orders of around Rs.62000 cr in Q4FY16 (till Q3FY16, total order inflow was around Rs.93548 cr) i.e. an increase of around 28% YOY & 58% sequentially (QOQ)  to meet the above target as Q4FY15 order inflow was at around Rs.47600 cr. This may be a tall task by the company.

L&T is relying heavily on infra order/project executions in Middle East despite soft Oil prices and dwindling fiscal position of  those Oil rich countries. In the domestic front, the company is hopeful for more Govt. orders in the railways, infra and the defence sector in the coming months. 

Now, all the above sets of  news may have been largely discounted by the market as it has already corrected by over 40% since mid-July'15 top of around 1890. 

Looking forward, technically 1065-1040-995 may be a strong support zone for L&T unless Nifty holds 7200-7100 level. If Nifty broke this level, then L&T can also dip to 898-860 zone; i.e. going forward, L&T may be a market performer, unlike huge under performer for the last few months. But overall downtrend may remain, if it does not sustain above the key level of 1160 in the near term.

Looking at the chart, L&T is clearly in the corrective EW cycle since mid-July top and after the full cycle (1-5 & A-B-C), currently it may be in the fresh corrective EW cycle in daily mode. The extended target of the current 1-st wave may be 1040-990 zone, if sustained below 1065 area. This downside EW may be invalidated, if it close consecutively for at least 2/3 days above the 1160 zone.

Going forward, apart from its usual core operations & order inflow news, deleverage may be the drivers of the stock. As par reports, Adani Powers may buy one of the L&T thermal power units in Punjab for around Rs.3300 cr along with the projects debts. This power plant was set up by L&T for around Rs.9600 cr two years ago. The plant is running around 50% capacity as Punjab is a  power surplus state now and there are some contractual controversy regarding power generation cost with PSPCL. Adani group may be ideal for smooth functioning of the plant.

L&T may also sell some of its cement plants, L&T Finance stake (which is a ongoing process !!) and it may also list the L&T Infotech in the months ahead. Although these deleverage news is already known to the market, actual implementation & figures/facts may support the stock from sudden drastic fall from time to time.

Analysts are also of the opinion that despite the L&T management sees some "green shoots" in the domestic economy, the Q3 result itself indicates that overall economic environment still remains very challenging and expectations are still muted on the private capex. In the near term, the big hope on the increase in public & Govt investment may disappoint as there will be big challenge in meeting the targeted fiscal deficit.  

As par BG metrics and current market parameters:

(based on TTM & FWD EPS)

Current median valuation of L&T may be around : 1080 (FY:15/TTM)

Projected fair valuations might be around: 970-1085-1140 (FY:16-18/FWD)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
LT	50.25	439.15	18	1149.61	1005.86	1077.73	1461.15	1118.57

LT

40.75

483.15

18

1035.26

905.80

970.53

1461.15

1118.57

LT

50.95

531.25

18

1157.59

1012.84

1085.22

1461.15

1118.57

LT

56.25

585.35

18

1216.31

1064.21

1140.26

1461.15

1118.57

Analytical Charts:

 

ICICI Bank:Sustain Abv 243-253 Zone May Be Very Tough Under The Changed Scenario--

 Immediate downside target may be 213-203

Q3FY16 PAT is slightly below estimates supported by other income & Tax Adjustments

And NII beats consensus by around 1%

But provisions rise 190% (YOY) and 202%(QOQ), 

Which may be beyond any street estimates---

Thanks to RBI rule of early recognition of stressed assets

This trend may continue for the next few quarters---

CMP: 233

Either sell below 230-227 or on rise around: 243-253;

TGT1: 217-213*-203*  (1-3M)

TGT2:188*-180 & 160-151*-145 (6-12M)

TSL > 257/265* 

Note: 

For ICICI Bk, 213 & 203 is a strong support and sustain below 203, more pain can come up to 188-151 zone.

Consecutive closing above 265 for any reason, ICICI Bk may rally up to 278-285 & 300-320

in the mid to long term (alternative bullish scenario).

Some key takeaways of the Q3FY16 result:

ICICI Bank reported Q3PAT of around Rs.3018 cr against consensus of Rs.3044 cr (YOY-2889 & QOQ-3030); i.e. PAT up by around 4.5% YOY, but down by 0.40% QOQ.

The marginal 4.5% YOY growth in PAT was also helped by deferred tax adjustments of Rs.733 cr.

Q3 EPS was at 5.17 against median estimate of 4.99 (YOY-4.94; QOQ-5.18).  

Notably, other income grew by almost 36% YOY to Rs.4217 cr and net profit from I-Pru stake sale was at Rs.1243 cr. In fact, this 4% stake sale saves the day for ICICI Bank.

The bank also sold another 11% stake of I-Pru to Temasek (Singapore) and Fairfax (Canada) for Rs.2100 cr, which may be accounted in Q4FY16 after getting approval from FIPB.   

NII grown by around 13% to Rs.5453 cr against estimate of Rs.5392 cr on the back of 20% surge in retail loans.

But provisions for bad loans (stressed assets) jumped by around 190% and 202% on YOY & QOQ basis to Rs.2844 cr in Q3FY16. 

Bad loans of ICICI Bank now stands around 4.72% of total loans compared to 3.77% in the previous quarter (QOQ).

In absolute terms, the bank's net NPA shot up by around 47% (QOQ) & 108% (YOY) to Rs.9908 cr in Q3, primarily on one large steel co (most probably its Essar Steel ??). 

As par the management, its exposoure to total steel sector stood at around 4.5% of total loan book. Also power sector is a headwind for ICICI Bank.

There was some silver lining in retail business of the bank in Q3, which clocked 24% YOY growth and retail loan portfolio now constitutes around 44% of the total loan book of ICICI Bank.

As usual, RBI's rule on early recognition of stressed assets and provisioning for the same had an impact on NPA(s) and bottom line on nearly all the banks and ICICI is also one of them. RBI has asked all the banks to come clean by FY-17 with quarterly review/recognition (Q3 & Q4FY16). As par the management, almost 60% of the provision is due to this new RBI directives about NPA management.

The management of the ICICI Bank is also not very optimistic about the coming days and expecting similar slippages and provisioning in Q4FY16 amid global (China) slowdown, currency wars, depressed commodity prices and subdued corporate activity in India. The management refrained from giving any earning guidance for FY-17 and looked less confident on a significant turnaround on asset quality soon. The management blamed steel sector as one of the reason for abnormal surge in provisioning in Q3. 

As par the management, private investment cycle is not picking up, but its seeing some ray of hopes for the MSME sector with the gradual increase in Govt. spending. 

The bank also restructured loans of around Rs.500 & 1600 cr in 5:25 scheme and SDR scheme in Q3FY16. 

In Q3FY16, NIM of ICICI Bank grew by 0.7% (YOY) to 3.53% mainly due to decline in cost of funds from its international operations. As par the management, going forward, NIM could come under pressure as more loans will not earn interest as they are classified as NPA and also due to change in norms to calculate base rate as prescribed by RBI.

Consequently, various analysts cut down their previous EPS estimates by around 10% and are describing the present NPA scenario after RBI directive as a "tip of the iceberg" and just beginning of a "huge tsunami".  

Till some time now, we all believed that this NPA problem is just an issue of "Sarkari Banks" (PSBS), but now with result of ICICI & Axis bank, this may also be a generic issue for private banks as economic slow down is also affecting them.

What spooked the market about this NPA fiasco is that the huge disclosure by the banks after RBI pressure and the market is getting a glimpse of the real problem (stressed assets) in the banking space.

For ICICI Bank, some analysts are apprehending more bad numbers in Q4 for these provisioning (market buzz that accounts like JP Associates may be figured in the next QTR). 

More over, ICICI bank had guided around 90-95 bps as credit costs in the beginning of the FY-16 and was sticking long throughout the year with this guidance. But now, towards the end of the FY, the management is now declaring a credit costs of around 180 bps, which is almost double of the previous guidance. Thus analysts are concerned about the lack of clarity (or credibility ??) in ICICI Bank's disclosure in Q3, unlike Axis Bank, which has come forward this time (after spooked in Q2FY16) with clean disclosure about all the stressed assets.

For ICICI Bank, analysts cut their EPS & TP primarily on the back of higher credit costs, lower NIM and fees.

But, relatively new generation private banks, such as Yes Bank, IIB, Kotak may not be so much affected as these are behind the "boom & dust" cycle followed after 2007-08 recession period. These are mainly retail banks and did not lend heavily to corporates compared to their peers (except HDFC Bank). 

There were some similar concerns for Yes Bank in the past, but it seems that the bank did not disburse the sanctioned credit limit fully to some of the highly indebted and stressed corporates and thus managed the NPA situation quite good despite having 67% advances to corporates.

There are significant surge in stressed assets in the last few years for Indian banks, specially PSBS as economic slowdown coupled with stretched balance sheets and high bank interest regime along with irresponsible borrowings on the part of the corporates, which has worsened the situation.  

As par some reports, total provision requirement for this RBI directive is around Rs.1 lac cr, while the cumulative profits of all the Indian Banks are around Rs.30/35000 cr and the provisions may wipe out next 2/3 years of profit in the banking sector.

Many corporates went for expansion, diversification and capacity additions and gone for maximum leverage by raising finances from various sources including Indian Banks & USD/FX dominated external commercial borrowings, but they miscalculated on future domestic demand potential and current global scenario (slowdown).  Now, with appreciating USD, the problem may be quite serious, if not properly hedged.

Thus unless we see real visible economic recovery in India, substantial portion of the current provisions may be turned into a permanent write offs for the Indian Banks and along with that huge fund requirements of Basel-III norms, the total situation may turn into quite complicate.

Though Indian corporates are trying their best to deleverage by selling non-core assets and repaying some portion of the huge debts, looking ahead, in the scenario of global slowdown and excess capacities, the process may not be smooth enough.

Foe PSBS, Govt may help for recapitalization, but that too may very little and too late. For  some of the private banks, there will be no option, but to take the market route and PSBS also has to take this market route partially. But both these options may not be EPS accretive in nature in the near term for the banking sectors.

Now, all the above bad news was largely priced in the stock of ICICI Bank as it already corrected by over 32% from its mid-July'15 peak.

Technically, the scrip has strong support zone of around 213-203 zone and unless and until overall market does not break 7200-6900 level, ICICI Bank may not break the above levels on the downside. But, looking ahead, 243-253 might be proved as strong resistance zone for it, until some more clarity emerges about the magnitude of its stressed assets.   

   

As par BG metrics and current market parameters:

(based on TTM & FWD EPS)

Present median valuation of ICICI Bk may be around: 280 (FY:15-16/TTM)

Projected fair valuations might be around: 300-315 (FY:17-18/FWD)

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
ICICIBANK	20.43	138.37	15	292.09	268.13	280.11	278.41	234.6

ICICIBANK

20.45

151.25

15

292.24

268.26

280.25

278.41

234.6

ICICIBANK

22.95

165.65

15

309.58

284.18

296.88

278.41

234.6

ICICIBANK

25.75

183.25

15

327.93

301.02

314.47

278.41

234.6

Analytical Charts: