L&T - Keeping up the show... - ICICIDirect

Robust execution helped L&T to post a Rs.500 crore beat on the topline, which came in at Rs.11955 crore vs. our expectation of Rs.11310 crore. Reported margins at 9.1% got impacted by 200 bps owing to a Rs.267 crore forex loss (loans and business factors) but were still lower as higher execution came in from infrastructure segment where margins are relatively less. A 125% rise in other income (owing to 4x rise in dividend from subsidiaries) led to reported PAT rising by 16% YoY to Rs.864 crore.

- Meets ~25% of inflow guidance, management reiterates confidence

A 21% YoY rise in order inflows at Rs.19600 crore in Q1FY13 implies that L&T has already met ~23-24% of if its own target inflow guidance on the one hand. On the other hand, the Q1FY13 performance implies 25% achievement of our FY13E estimates of Rs.78000 crore. The handsome rise in orders was mainly owing to spillover of orders from Q4FY12 (management had indicated the same during Q4FY12). Post the results and given the challenging environment, the management has reiterated its guidance of 15-20% inflow growth for FY13E whereas we estimate it at 11% YoY.

- Defocus on BOT projects to improve RoEs, key investor positive

A key positive development has been addressing investor concern with respect to investments in capital guzzling BOT projects. The management has decided to defocus on BOT projects rather monetise assets under development via IPO/stake sale to P/E firms in individual subsidiaries/SPVs to maximise shareholder value. As of Q1FY13, investments and loans to subsidiaries account for 20%/54%/38% of parent's balance sheet, net worth & capital employed, respectively. This makes us believe RoEs will trough at current levels and will only inch up.

- Consensus divided on multiples but we remain relatively upbeat

There is a consensus on the quantum of YoY PAT growth for L&T in FY13E (10%). We believe the Street is divided on ascribing a P/E multiple to the base business (range of 10-16x on one year forward multiple). We remain relatively upbeat and are on the upper range of the consensus band given L&T poses best earnings visibility (16% revenue CAGR over FY12-14E), solid balance sheet and intention to increase base RoEs via monetisation of key subsidiaries. Maintain BUY with fair value of Rs.1523.

Source : Equity Bulls

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