Larsen & Toubro Limited - Focus on execution, margins - Antique

With strong beginning in 1QFY14, L&T appears well on track to achieve 15-20% order-intake growth in FY14. Given adverse macro-environment, this is commendable and will support stock valuations. However, in the near term, investors' focus is likely to shift to execution and profitability. We believe that while execution will be healthy with relatively stable margins in FY14, one cannot rule out slowdown if political landscape changes, given that a lot of infrastructure projects which are being executed by L&T will slowdown. Despite near-term concerns, L&T remains a credible play on India capex and will stand to gain from any pick up in infrastructure investment activity. We maintain BUY.

LT begins 1Q with strong order inflow

Despite weak capex environment, L&T has started FY14 with a strong order inflow in 1Q. The company has maintained its guidance of 20% growth in order intake in FY14, likely to be boosted by infrastructure and hydrocarbon sectors. The company expects ordering from Infrastructure sector to grow by 26%, from INR396bn in FY13 to ~INR500bn in FY14 driven by growth in transportation segment. Order intake from transportation segment (INR125bn in FY13) is expected to grow to INR225bn in FY14. Hydrocarbon segment is expected to grow by 70% from INR88bn in FY13 to INR150bn in FY14 driven by domestic orders which were not present in FY13. The management also expects pick up in international orders from INR120bn in FY13 to ~INR250bn in FY14. We have considered order intake growth of 15% in FY14.

International orders to add to growth

The company expects pick up in international orders from INR120bn in FY13 to ~INR250bn in FY14. Orders are expected to come from hydrocarbon, transportation, airports and civil construction sectors. The company is L1 in three sections out of six sections, each worth ~USD300m in Batinah Expressway project, Oman. L&T is also targeting road interchange packages in the Middle East. The company has got pre-qualification for projects in Middle East from Saudi aramco, Petroleum development Oman (PDO), BP, Petronas etc, and is bidding for orders valued ~USD200m to USD500m. The company is looking for opportunities in metro and rail segments, currently targeting USD7 bn Riyadh Metro project and USD11 bn Etihad Rail project. For airports, it is looking for opportunities of USD300-400m in projects in Nairobi, Quwait, Bahrain, Tanzania and Nepal.

Focus on execution, revenue growth and margins

The company's revenue growth rate has been declining sequentially since 2QFY13, which has raised concerns on the execution of key projects across sectors facing delays. Slow execution also impacted profitability in 4QFY13. So far in the year, there is no indication of any fresh concern of delayed execution, but it will remain a key overhang on the company's performance in ensuing quarters given that 40% of L&T's orders are Government jobs . Also, the company has stated that its overseas orders enjoy upto 200bps lower EBITDA margins, there is likelihood of stagnation in margins in the near term if there is any meaningful slowdown in revenues.

Valuation and outlook

We expect consolidated earnings to increase by 17.3% to INR60.9 in FY14 and by 18.5% to INR72.1 in FY15. Our SOTP target of INR1,215 includes standalone business at 16x FY15e earnings at INR945 and subsidiary valuation of INR270. We maintain BUY.

Source : Equity Bulls

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