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Larsen & Toubro- Improved execution led to strong topline growth; Buy
Q3FY11 results of the company were largely in line with our estimates.
Operating income grew 40% yoy to Rs 11,413 cr against Rs 8,122 cr in
Q3FY10. However raw material expenses jumped by 86.7% YoY leading
to 151 basis points decline in EBITDA margins. Rising commodity prices
and price escalation lag in variable price contracts have put the margins
under pressure across the segment. Engineering & Construction (E&C)
segment continued with its impressive growth improving its contribution
to the topline by 255bps to 86%. Interest expenses went up 31% yoy on
account of increased borrowing and higher interest cost. The company
divested a stake in its subsidiary and associate company resulting in a
one time gain of Rs 35 cr. Order inflow for the quarter was Rs. 13,366
crore and order backlog at the end of the Q3FY11 stood at Rs.114,882
crore giving it a revenue visibility for 3.13 years.
Ramp up in execution
Revenue increased by 40% YoY largely led by the improved execution in
infrastructure and power orders. Revenues from E&C segment went up by 42.4%
to Rs 10,004 cr from Rs 8,015 cr in Q3FY10.Company’s sales is up 22% for the
9MFY11 and it’s well on its way to achieve guidance of 20% topline growth.
Rising commodity costs impacts margins
EBITDA margins in Q3FY11 declined by 151 bps on account of sharp rise in
commodity prices and few projects not reaching margin recognition stage. L&T
has two third of its projects with price escalation clause but with a lag effect.
Going forward, rising input cost will be passed on to the consumers, though there
will be margin pressure in the fixed price contracts. PAT margins also witnessed a
decline of 195 bps yoy due to lower operating margins and higher tax rate.
Muted growth in order book
The order inflow during the quarter remained muted amounting to Rs 13,366 cr
against Rs 17,793 cr in Q3FY10 and Rs 20,464 cr in Q2FY11. Stiff competition
from Chinese players as well as project delays and knocking off few very old
orders led to the slow growth. Order backlog at the end of Q3FY11 stood at Rs
114,882 cr against Rs 115,393 cr at the end of previous quarter. Infrastructure
contributed to 50% to the order inflow in the quarter followed by power at 32%.
Approximately two-third of the company’s order book has pass through clause.
Our View & Valuation–
L&T has delivered the results ahead of consensus estimates and it is all set to
achieve topline growth of 20% in FY11. Although, muted order inflows and
margins contraction has been a bit of disappointment. Going forward, we believe
that revival in industrial capex cycle and power sector investment is going to be
key driver for its business. At a CMP of Rs. 1,679, L&T is trading at ~25x FY12
earning, which is at significant discount to its historical averages. Company is
best placed among its peers to capitalise on India’s infrastructure capex. We
maintain our “Buy” recommendation on the stock with target price of Rs. 2,160
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro- Improved execution led to strong topline growth; Buy
Q3FY11 results of the company were largely in line with our estimates.
Operating income grew 40% yoy to Rs 11,413 cr against Rs 8,122 cr in
Q3FY10. However raw material expenses jumped by 86.7% YoY leading
to 151 basis points decline in EBITDA margins. Rising commodity prices
and price escalation lag in variable price contracts have put the margins
under pressure across the segment. Engineering & Construction (E&C)
segment continued with its impressive growth improving its contribution
to the topline by 255bps to 86%. Interest expenses went up 31% yoy on
account of increased borrowing and higher interest cost. The company
divested a stake in its subsidiary and associate company resulting in a
one time gain of Rs 35 cr. Order inflow for the quarter was Rs. 13,366
crore and order backlog at the end of the Q3FY11 stood at Rs.114,882
crore giving it a revenue visibility for 3.13 years.
Ramp up in execution
Revenue increased by 40% YoY largely led by the improved execution in
infrastructure and power orders. Revenues from E&C segment went up by 42.4%
to Rs 10,004 cr from Rs 8,015 cr in Q3FY10.Company’s sales is up 22% for the
9MFY11 and it’s well on its way to achieve guidance of 20% topline growth.
Rising commodity costs impacts margins
EBITDA margins in Q3FY11 declined by 151 bps on account of sharp rise in
commodity prices and few projects not reaching margin recognition stage. L&T
has two third of its projects with price escalation clause but with a lag effect.
Going forward, rising input cost will be passed on to the consumers, though there
will be margin pressure in the fixed price contracts. PAT margins also witnessed a
decline of 195 bps yoy due to lower operating margins and higher tax rate.
Muted growth in order book
The order inflow during the quarter remained muted amounting to Rs 13,366 cr
against Rs 17,793 cr in Q3FY10 and Rs 20,464 cr in Q2FY11. Stiff competition
from Chinese players as well as project delays and knocking off few very old
orders led to the slow growth. Order backlog at the end of Q3FY11 stood at Rs
114,882 cr against Rs 115,393 cr at the end of previous quarter. Infrastructure
contributed to 50% to the order inflow in the quarter followed by power at 32%.
Approximately two-third of the company’s order book has pass through clause.
Our View & Valuation–
L&T has delivered the results ahead of consensus estimates and it is all set to
achieve topline growth of 20% in FY11. Although, muted order inflows and
margins contraction has been a bit of disappointment. Going forward, we believe
that revival in industrial capex cycle and power sector investment is going to be
key driver for its business. At a CMP of Rs. 1,679, L&T is trading at ~25x FY12
earning, which is at significant discount to its historical averages. Company is
best placed among its peers to capitalise on India’s infrastructure capex. We
maintain our “Buy” recommendation on the stock with target price of Rs. 2,160
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