Larsen & Toubro - Q2FY14 Update, CMP Rs.947, Maintain BUY, Revised Target of Rs.1138 - Sushil Finance

CMP Rs.947, Maintain BUY, Revised Target of Rs.1138

Revenue growth led by strong growth in Infrastructure & heavy engineering segments

During Q2FY14, L&T delivered 10% YoY Revenue growth, contributed by strong growth in its Infrastructure & heavy engineering segments, which grew by 36% & 79% respectively. The overseas market achieved 32% YoY growth on its strong execution & healthy order book. The Net Revenues of Infrastructure segment grew by 36% YoY to Rs. 71.5 bn led by healthy order book & strong project execution across transportation, power T&D and water biz, the heavy engineering segment grew 79% YoY to Rs. 10.4 bn, while the E&A biz segment grew 7% YoY to Rs. 8.4 bn. However, it witnessed de-growth in hydrocarbon, power, Metallurgical Material handling (MMH) & MIP business, which were down 9%, 40%, 19% & 5% respectively on YoY basis. Despite slower Revenue growth in H1FY14 (~8%), the management has maintained its FY14E Revenue growth guidance at 15%, which in our view looks difficult given slower pace of execution in domestic projects especially in power, hydrocarbon and MMH segments. we expect L&T to achieve ~12% Revenue growth in FY14.

EBITDA margins fall 100 bps YoY to 9.7% on higher staff cost & forex MTM loss

During Q2FY14, its EBITDA declined 0.4% YoY to Rs.14.02 bn, while its EBITDA margins fell 100 bps YoY to 9.7%, mainly due to higher proportion of low margin overseas Revenue (25% v/s 21% in Q2FY13), higher staff cost (22% YoY increase), forex MTM provision of ~Rs.2 bn. However, due to sharp increase in other income (37.2% YoY) boosted by dividend from subsidiaries & associates, its adjusted Net Profits (APAT) grew 7.1% YoY to Rs.9.8 bn. The company expects to maintain FY13 EBITDA margins in FY14 with variation of (+/-) 50bps. Considering higher contribution of export business, we expect its overall EBITDA margin to remain at 10.3% during FY14.

Strong order inflow driven by Infrastructure & hydrocarbon orders

During Q2FY14, the company witnessed strong order inflows in infrastructure (Rs.191.3 bn) and hydrocarbon (Rs.32.8 bn) segments, while the ordering environment in Power EPC, Mining, material & industrial remained weak. During the quarter, L&T's outstanding order book grew by 11% to Rs.1,760 bn, while its order inflows grew 26.5% to Rs.265 bn.

Going forward, the growth in domestic infra projects, and activities in Hydrocarbon & Power T&D in Middle East regions, will provide order inflow momentum. In view of current domestic & export market environment, the management expects to meet its FY14 order inflows growth guidance which is 20%, with strong focus on overseas orders. The current order book provides Revenues growth visibility for 2+ years. We expect L&T to achieve 20% growth in its FY14 order inflows and deliver decent Revenue growth in ensuing period.

OUTLOOK & VALUATION

Due to change in business mix and macro environment, its net working capital (NWC) has increased substantially in last 2 years and currently at 18% of sales. In our view, the higher NWC continues to be a concern going forward & company should bring it down gradually. However, L&T is comfortable with NWC in the range of 15-20% of its sales.

In view of its H1FY14 performance and business outlook, we have slightly increased our FY14E & FY15E Revenues estimates. While due to change in business mix on account of increased thrust in overseas market & slightly muted domestic environment, we have marginally reduced our FY14E & FY15E APAT estimates. We now expect L&T to deliver Revenue & APAT CAGR of 13.6% & 8.1% respectively over FY13-15E. At CMP of Rs.947 the stock trades at 17.8x & 15.9x its FY14E & FY15E standalone Earnings of Rs.53.5 & Rs.59.5, respectively. We maintain our 'BUY' rating on the stock with SOTP based target price of Rs.1,138.

Source : Equity Bulls

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