Kotak sec on L&T: Revise estimates and target price to Rs2,200; reiterate ADD

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Positive takeaways on execution, margins and order inflows. Highlights from the
2QFY11 results include (1) strong revenue growth of 18% yoy (in line with estimates)
alleviates concerns on execution, (2) contribution margin expands by 130 bps yoy
despite higher raw material costs, (3) higher other income boosts PAT and (4) strong
inflows of Rs204 bn boosted by power, infrastructure and in-house projects. Maintains
inflows (25%) and revenue (20%) growth guidance. Reiterate ADD (TP: Rs2,200).


Results broadly in line; strong execution and contribution margin expansion—key positives
􀁠 Strong execution—in line with estimates; possibly lifts subjective execution concerns:
L&T reported revenues of Rs93 bn, marginally (2.4%) above our estimates, up 17.8% yoy. Pickup
in the execution of several large-value projects possibly alleviates concerns on future
execution. The core E&C segment and MIP segment reported strong performance while the E&E
segment recorded a 5% yoy de-growth and 200 bps margin contraction.
􀁠 EBITDA margins in line; highlight strong contribution margin expansion: L&T reported
relatively flat EBITDA margin of 10.8% in 2QFY11 (broadly in line). The contribution margin of
the company recorded a strong 130 bps yoy expansion led by lower subcontracting expenses.
􀁠 Higher other income helps beat our estimates at PAT level: Net PAT of Rs6.9 bn was 6.7%
higher than our estimate led by higher-than-expected other income on account of profit from
sale of investment in Satyam and sale of property. Adjusted for this, L&T would have reported
in-line results at the PBT level as well.
Strong inflows driven by power, infrastructure and in-house projects; maintains full-year guidance
L&T reported very strong order inflows of Rs360 bn in 1HFY11, up 29% yoy from Rs279 bn in
1HFY10. Order inflows were driven by the power and infrastructure segments led by (1) additional
Rs30 bn for Rajpura power plant, (2) Rs28 bn turbine order from Jaypee Group (Karchana project)
and (3) Rs16 bn BoP order for Raigarh power project. L&T’s own in-house development projects
contributed to 28% the total inflows (versus 5% in 1HFY10). The management has maintained its
full-year order inflow guidance of 25% and revenue growth guidance of 20% for FY2011E.
Revise estimates and target price to Rs2,200; reiterate ADD
We have marginally revised our consolidated estimates to Rs76.7 and Rs90.5 from Rs74.5 and
Rs90 for FY2011E and FY2012E. We reiterate our ADD rating with a revised target price of
Rs2,200 (from Rs2,150) on (1) expected execution pick-up in 2H, (2) scale-up of power equipment
business, (3) capex revival, (4) value creation in subsidiaries and (5) strong balance sheet.