L&T - Call to order: Policy, demand hold key - Edelweiss

We analysed key verticals like Power, Metals, Hydrocarbons and Infrastructure to gauge the depth and diversity of L&T's order intake. Our bottoms up analysis deduces that the order intake for FY13E‐FY14E would grow at a CAGR of 11%‐12% led by a recovery across segments. We also foresee a strong growth in Hydrocarbons, Power T&D and Railways over FY13E‐14E given the robust project pipeline and L&T's clear focus. While policy traction remains critical in several issues including coal and land availability, the overall demand sentiment will also play a significant role to determine the extent of recovery in industrial capex. We maintain 'BUY' with a TP of INR1,528.

Bottoms up imparts visibility for order intake growth

We appraised projects in key verticals like Process, Power, Infrastructure, Hydrocarbons, etc to review our fresh intake assumptions for FY13E and FY14E. While we are confident of the overall new order intake growth of 10%‐11% over the next two years, we believe Hydrocarbons, Power T&D and Railways (DFCC+Metro) will support order inflow in the coming years.

Policy traction, demand sentiment hold key to recovery

As interest rates begin to come down, we remain optimistic about higher spending by the private sector. However, we also believe that policy action by the government in key areas like coal, iron ore, gas and environmental clearances would be critical to lift the sentiment as well as industrial capex hence this is the number one variable for the sector.

Outlook and valuations: Positives loom large; maintain 'BUY'

We continue to consider L&T as a benchmark indicator of the domestic industrial capex spending. Given the rate reversal and expected policy clarity in issues like coal, mining and large project clearances, we remain positive on the company over the next 12‐15 months. Moreover, value unlocking in subsidiaries like IDPL and the sale of switchgear business etc could further support the stock which currently trades at a P/E of 15.8x and 13.9x on FY13E and FY14E earnings respectively on a consol basis. We maintain BUY/SO rating on L&T with a revised target price of INR1528 (earlier INR1457).

Source : Equity Bulls

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