L&T - Management meet update - Angel Broking

We met the Management of Larsen & Toubro (L&T) to get an update on the company's existing business and its strategy going forward. The key takeaways from the interaction are as follows:

Order inflows momentum to continue: In spite of a challenging macroeconomic environment L&T has bagged healthy order inflows (Rs. 51,692cr) in 1HFY2014. This is mainly on the back of (a) high share of exports orders (power T&D and hydrocarbon) and (b) continued momentum in the infrastructure segment (building and factories, railways, airports, etc). The company is confident of achieving order inflows in excess of Rs. 100,000cr (~20% yoy growth) for the full year. The Management expects international orders to pick up from Rs. 14,966cr in FY2013 to Rs. 25,000cr in FY2014. Given the healthy order inflows in 1HFY2014, we expect the company to achieve order inflows of Rs. 99,000cr for FY2014.

Maintain its guidance for order book and revenue: The Management continues to maintain its guidance of 15% growth in revenue and 20% growth in order inflow. We believe given its robust order backlog, healthy order inflows in 1HFY2014 and strong execution capabilities; the company is well placed to achieve its guidance on both- order inflows and on the revenue front.

IDPL asset monetization-a key: The company has already invested ~Rs. 6,400cr in its under-development portfolio till 1HFY2014 and would require an incremental equity investment of Rs. 6,900cr over the next 3-4 years. The company is planning to raise funds through dilution of stake in L&T Infrastructure Development Projects (L&T IDPL) or monetization of existing non-core assets (monetization of Dharma port likely). We believe this would help the company to fund its equity requirement.

Outlook & valuation: We believe L&T will continue to occupy a unique position in the Indian E&C space as a diversified and large engineering play, with exposure to areas ranging from power, defense, nuclear and equipment, in spite of short-term concerns. Given its robust order backlog, healthy order inflows during the past few quarter, and strong execution capability, the company is well placed to achieve its guidance on both- order inflow and revenue front. It is also best placed to benefit from a gradual recovery in the capex cycle given its diverse exposure to sectors and a strong balance sheet. Going forward, on the back of healthy order book mix, we expect the company to report a revenue and PAT CAGR of 10.8% and 6.1% over FY2013-15 respectively.

At the current market price of Rs. 1,062, the stock is trading at 16.1x FY2015E earnings and 2.8x FY2015E P/BV on a standalone basis. We have used the sum of-the-parts (SOTP) methodology to value the company to capture all its business initiatives and investments/stakes in subsidiaries and other businesses. Ascribing separate values to its parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to Rs. 1,237. We maintain our Buy rating on the stock.

Source : Equity Bulls

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