Larsen & Toubro - Bright outlook, but margin may disappoint; Buy - Anand Rathi

Revenues in line, margins disappoint. Larsen & Toubro's (L&T) 4QFY13 revenues were a mixed bag. While revenues of Rs. 203bn (+10% yoy) surpassed our estimates of Rs. 185bn, operating profitability disappointed. At 12.1%, OPM was significantly lower than our expectations of 16%, while EBIDTA ofRs. 24.5bn was below our estimates of Rs. 29bn. The company recorded PAT of Rs. 17.9bn (8% lower yoy), 15% below our estimates of Rs. 20bn.

On a standalone basis, L&T's revenues and EBIDTA in FY13 stood at Rs. 609bn (+15%) and Rs. 64bn (+2%), respectively. At 10.5%, OPM was 130bps lower yoy, as cost escalations, slow pace of execution and an unfavourable product mix took a toll on operational profitability. A lower effective tax rate, however, helped boost profits to Rs. 49.1bn (+10%), in line with our estimates.

Bright outlook, but profitability could dip. The company received orders of Rs. 880bn in FY13, 10% above its guidance. After eliminating slow-moving orders of Rs. 170bn, its unexecuted orderbook (OB) stood atRs. 1,536bn, implying TTM OB coverage of 2.52x (standalone). Going forward, it has indicated that it would be targeting 20% growth in order inflows due to sizeable order wins abroad and recovery in domestic markets. Simultaneously, the company has pointed out to lower margin profile of international orders owing to its recent entry in the arena and stiff competition.

Our take. Currently, L&T is faced with the typical 'Volume-Value' trade-off quandary. Given its strategic foray into the international hydrocarbons markets and fruition of some long gestation projects in the power and infrastructure verticals, revenue growth could be stupendous, but at the cost of margins. At Rs. 1,517, L&T trades at P/E and EV/EBIDTA of 16.7x and 12.8x, respectively, discounting our FY14e estimates. We believe there's still some steam left in the stock and hence maintain Buy with target price of Rs. 1,668.

Source : Equity Bulls

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