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Research
Neutral on L&T - Motilal Oswal
Posted On : 2010-08-09 09:36:00( TIMEZONE : IST )
Larsen & Toubro (LT IN; Mkt Cap USD24b, CMP Rs1,863, Neutral);
- Execution below estimates, adjusted EBITDA margins at 12.2%: In 1QFY11, L&T posted revenue of Rs78b (up 6.4% YoY), significantly below our estimate of Rs89b (up 19%YoY). EBITDA margins were 12.2% (higher than our estimate of 10.9%), an improvement of 153bp YoY. Net profit (adjusted for capital gains and provision reversals) was Rs6.6b (up 15% YoY), above our estimate of Rs6.52b (up 13% YoY). Execution in 1QFY11 was impacted, resulting in just 1% growth in revenue of the engineering and construction division to Rs66b. However, at the electricals and machinery divisions revenue grew 29% and 25% respectively. Order backlog was Rs1,078b (up 50% YoY) and order intake was Rs156b, up 63% YoY.
- E&C EBITDA margins up due to decline in commodity prices: In 1QFY11, E&C EBITDA margins increased 190bp YoY to 13.5% mainly due to a decline in commodity prices. Fixed contracts accounted for ~50% of the order book resulting in better margins on reduced material prices. Material costs themselves dropped 500bp YoY during the quarter. EBG and MIP EBITDA margins were down 185bp and 77bp YoY to 11% and 22% respectively due to lower export realizations and a change in the product mix.
- Order intake growth guidance 25% YoY: Order-intake in 1QFY11 grew by 63% to Rs156b. Currently the order-book is Rs1,078b, implying book-to-bill ratio of 2.9x TTM revenue. The management is confident of achieving 25% YoY growth in FY11 on the back of large order from Hyderabad Metro Rs128b and from road sector (Rs20b) in FY11.
- Valuation and view: We are revising upwards L&T's standalone earnings estimates by 7% and 6.5% for FY11 and FY12 respectively. EPS is Rs63.6 for FY11 and Rs76.4 for FY12. Consolidated estimates will change by 5.6% and 5.1%, respectively to Rs76 and Rs94 in FY11 and FY12. Our revised target price for L&T is Rs1,915, based on SOTP. Valued at 20x FY12E standalone earnings (earlier 18x) and Rs369 for subsidiaries. Neutral.
