L&T - Asset sales to drive rerating - AXIS DIRECT

We met the management of L&T. Key takeaways:

FY14 order inflow outlook remains robust... Railways, Oil & Gas and large Infra projects in the Middle East to be key drivers for FY14. While the management did not guide for FY14, we expect 15% growth.

...but revenue growth to be lower: Management expects execution to pick up in H2 while H1 will also be impacted by high base (21% growth in H1FY13). Hence we reduce our FY14E revenue growth to 12% from 16% (14% in FY13E).

Management believes E&C margin has hit a bottom in FY13 (at 12.4% vs. 13.2% in FY12) and expects the level to be maintained in FY14. However, we expect FY14 E&C margin to contract by 60 bps on adverse mix.

Meeting FY13 inflow guidance contingent on Rs 95 bn worth L1 orders materializing: L&T requires Rs 200 bn worth of orders in Q4 to achieve the lower-end of its FY13 guidance of 15-20% growth. In Q4 till date, it has announced orders worth Rs 40 bn and past run-rate for small unannounced orders is Rs 30-50 bn. L&T is L1 (lowest bidder) in orders worth Rs 95 bn.

Asset sales may trigger rerating: Management reaffirmed it will not take additional BOT assets (30% of consolidated capital employed) in line with its asset light strategy. However, it did not confirm recent media reports indicating sale of Dhamra port, sale of construction equipment business, and 20% equity dilution in its subsidiary Infrastructure Development Projects Ltd. We believe cash flow from asset sales will lead to lower investments by L&T into IDPL and thus result in higher RoCE.

Valuation

We reduce our FY14/FY15 EPS estimates to Rs 78/ 92 from Rs 87/ 100 earlier to factor in lower revenue growth. Maintain BUY with revised SoTP-based TP of Rs 1,726 (Rs 1,886 earlier) based on 16x FY15E and value of investments at Rs 428/share.

Source : Equity Bulls

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