Larsen & Toubro – ADD says IIFL

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Larsen & Toubro – ADD Steady quarter; growth to pick up in 2H
L&T’s 2QFY11 results were above our estimates. The company maintained its FY11 guidance for 20%
revenue growth, stable margins and 25% order inflow growth. The accelerating trend in execution
suggests that the 27% implied revenue growth in 2H vs 12% in 1H is achievable. L&T is also on track
to meet the order inflow guidance. But increased contribution from long-gestation projects means that
upsides to our revenue estimates are limited. Gains from better-than-anticipated margins were
partially offset by higher interest costs, driven by larger investment outlays. We upgrade our FY11
earnings estimates by 4.5%, but FY12-13 estimates remain largely unchanged. We retain ADD.
Growth to accelerate in 2H: The 17% YoY growth in the E&C business, despite heavier monsoons, is
reasonable. Overall growth was marginally pulled back by 5% YoY decline in the E&E segment. The company
had been guiding for back-ended growth in FY11, as 60% of FY10 order inflow was in 2HFY10 (34% in 4Q).
Growth would pick up, as a number of initial-stage large-value projects enter revenue booking phase in 2H.
Adjusted PAT grew 13% YoY; adjusted EBITDA margins expanded 80bps YoY: Excluding Rs600m
forex losses, EBITDA margins expanded 80bps. 1H EBITDA margins have expanded 110bps YoY. We forecast
margins to remain stable in FY11 to factor in any adverse surprises in input costs. Even after adjusting for
one-offs of Rs320m, interest expenses were higher than expected. We expect borrowing costs to inch higher,
driven by increased investment outlays and ~Rs10bn outflow for buying out minorities in IDPL.
Captive orders to help achieve 25% order inflow guidance: 1H order inflows total to Rs361bn, helped
by 28% contribution from captive projects. The company needs Rs509bn order inflows in 2H to meet 25%
order inflow guidance. Order inflows worth Rs80bn-100bn from the captive Hyderabad metro project in 4Q
and ~Rs50bn bulk orders for supercritical boilers from NTPC would help achieve the target.