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Research
Larsen & Toubro Limited - Strong getting stronger - Antique
Posted On : 2013-06-22 00:44:20( TIMEZONE : IST )
LT, despite adverse macro environment, has reported strong order-inflows growth of 25% in FY13 to INR880bn. We believe that the company will gain from any pick up in infrastructure investment activity, as peers continue to struggle due to stretched balance sheets. The management has guided for 20% growth in order inflow growth in FY14e and expect pick up in international orders from INR120bn in FY13 to ~INR250bn in FY14. Order book increased by 5% to INR1.53tn despite removal of INR170bn slow moving orders, providing visibility over next two years. L&T remains our preferred large-cap capital goods stock.
Core infrastructure strong with support from international orders
Orders from infrastructure has increased by 17% YoY to INR396bn in FY13 driven by core infrastructure, such as transportation, real estate, factories, education sector, etc. The company had 45% orders from Infrastructure, while power and Hydrocarbon constitute 30% and 10%, respectively, in FY13. Ordering from hydrocarbon sector has reported growth of 13% to INR88bn and picked up in 4QFY13 with inflow of INR21.9bn. LT reported order inflow at INR264bn, a growth of 78% YoY in FY13 in power segment. We expect order inflow growth of 15.2% and 10.1% for FY14e and FY15e, respectively.
New segments and buisness can provide upside
L&T IDPL, the infrastructure development arm of L&T, is expected to raise its own resources for further growth and is considering various options for raising funds, including IPO, bringing in strategic partner, monetization of assets.
Margins to remain stable after correction in FY13 to 10.5%
LT reported 130bps decline in margins to 10.5% in FY13 due to impact of cost pressures, job mix and a base level of fixed price contracts (~40% of contracts). The easing pressure from input cost and strong execution are expected to support margins going ahead.
Valuation - improved earnings outlook to re-rate the stock
We expect consolidated earnings to increase by 17.3% to INR91.6 in FY14e and by 17.8% to INR107.8 in FY15e. SOTP target of INR1,819 includes standalone business at 16xFY15 at INR1,412 and subsidiary valuation of INR407. We believe that stock offers long-term investment potential, even though one can not rule out volatility due to fluid macro-environment. Maintain Buy.
