Larsen & Toubro Limited - Earnings visibility improves - Antique

Larsen & Toubro's valuations have been on a roller coaster ride over the past two quarters. The stock has significantly outperformed the broad market, since the beginning of Sep-13, after consistently underperforming prior to that. This resurgence is on account of steady performance and renewed hope of a capex recovery. The company will continue to report strong growth on the back of improved execution, despite a challenging environment.

Order intake to remain strong

The company is confident of meeting its order inflow growth guidance of 20% in FY14. L&T's order inflow grew 27% to INR516.9bn in 1HFY14. To meet this guidance, it needs to book orders worth INR539bn, a growth of 14% YoY in 2HFY14. It has done well in FY14 due to its expertise in diversified segments, which bodes well for the future. Roads, water, power T&D, power BTG, and hydrocarbon export orders will drive growth in FY15.

Execution pick with margin stability

Execution slowdown has been among the key concerns in the past three-to-four quarters. For 1HFY14, L&T's revenue grew 8%, way below its normal growth rate. However, the company has maintained its revenue growth guidance of 15%, and believes revenue growth will pickup in 2HFY14. The company has maintained a stable margin outlook for FY14. We do see the recent spike in domestic metal prices adversely impacting margins, given that ~60% of orders do have price escalations. The commodity price impact in overseas orders has been limited. Though we remain cautious on margins, L&T should be able to protect its profitability in FY14-15.

Steady outlook for L&T IDPL

L&T Infrastructure Development Project's asset base has grown at a 25% CAGR over FY05- 12. The company is targeting 40% revenue CAGR over the next five years while focusing only on profitable projects with target internal rate of return of 18%. It expects equity requirement of ~INR82bn over FY14-18. L&T IDPL expects to meet this by: 1) INR20bn through equity infusion by an investor (likely soon); 2) INR9bn through sale of stake in Dhamra Port; 3) INR13bn from a strategic investor (26% stake) in the Hyderabad metro project; 4) INR40bn through portfolio churns, discounting future cash flows, and debt at the IDPL level. Over the next three-to-five years, the company will have a stable portfolio of projects, which will start yielding results.

Valuations

L&T is a strong play on an economic revival and will re-rate with an improvement in growth visibility. We are raising our FY14e and FY15e consolidated EPS estimate by 3.5% and 3.3%, respectively. We are revising our target price to INR1,241 per share, based on 16x FY15e standalone earnings and INR310 per share for subsidiaries. We maintain our Buy recommendation.

Source : Equity Bulls

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