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A good opportunity when the tide is low
Cost structure and margin trend
As a result of increasing cost pressure due to rising costs of raw
materials and other ancillaries, we forecast L&T’s standalone
EBITDA margin to contract by 100bp from 12.8% for FY10 to
11.8% for FY13. However, we believe that L&T is better placed
than its peers to manage cost pressures given its spread of
projects. We have also factored in a margin decline in FY13 due
to the rising revenue contribution from its power-equipment
venture. According to the management of the power venture, the
EBITDA margin should be similar to those of L&T (11-12%)
and the power venture should break even with a consistent
capacity utilisation rate of 60% of its capacity of 4GW.
Can costs be passed on?
During earlier periods of rising costs (FY05-08), the company
demonstrated its ability to pass on cost increases for its project
business with a lag. About 70% of its current order book of
Rs1,148bn has contracts with pass-through clauses. However, in
the case of its product businesses, increased competitive intensity
has restricted price increases, and hence margins have come under
pressure. We expect this trend to continue into FY12.
Valuation and recommendation
We maintain our 2 (Outperform) rating and SOTP-based sixmonth target price of Rs2,015. L&T is our top pick in the sector,
as we believe it would be a primary beneficiary in the event of a
pick-up in the capex cycle.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A good opportunity when the tide is low
Cost structure and margin trend
As a result of increasing cost pressure due to rising costs of raw
materials and other ancillaries, we forecast L&T’s standalone
EBITDA margin to contract by 100bp from 12.8% for FY10 to
11.8% for FY13. However, we believe that L&T is better placed
than its peers to manage cost pressures given its spread of
projects. We have also factored in a margin decline in FY13 due
to the rising revenue contribution from its power-equipment
venture. According to the management of the power venture, the
EBITDA margin should be similar to those of L&T (11-12%)
and the power venture should break even with a consistent
capacity utilisation rate of 60% of its capacity of 4GW.
Can costs be passed on?
During earlier periods of rising costs (FY05-08), the company
demonstrated its ability to pass on cost increases for its project
business with a lag. About 70% of its current order book of
Rs1,148bn has contracts with pass-through clauses. However, in
the case of its product businesses, increased competitive intensity
has restricted price increases, and hence margins have come under
pressure. We expect this trend to continue into FY12.
Valuation and recommendation
We maintain our 2 (Outperform) rating and SOTP-based sixmonth target price of Rs2,015. L&T is our top pick in the sector,
as we believe it would be a primary beneficiary in the event of a
pick-up in the capex cycle.
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