Larsen & Toubro: Margin concerns amidst high expectations in a slow environment ::Kotak Sec

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Larsen & Toubro (LT)
Industrials
Margin concerns amidst high expectations in a slow environment. L&T saw
1QFY12 revenue growth of 21% yoy while EBIT margin declined 230 bps yoy, resulting in
yoy flat EBIT. PBT-level growth of 12% was primarily on higher interest and other
unallocable corporate income. 1QFY12 order inflows of Rs162 bn were marginally higher
(by 4%) than 1QFY11 levels. Retain REDUCE (TP: Rs1,800) on potential margin pressures,
relatively high expectations and valuations in a weak demand environment


Margin declines across segments - PBT growth seems to be led by interest and unallocable income
L&T reported sharp margin decline of 160-300 bps yoy across all the three major segments.
Cumulative segmental EBIT margin declined by 230 bps resulting in a relatively yoy flat EBIT. The
12% growth seen at the PBT level was likely led by sharp increase in interest and other
components of unallocable corporate income, up almost 180% yoy to Rs2.1 bn versus Rs748 mn
in 1QFY11. High interest income of Rs1.36 bn versus Rs650 mn in 1QFY11 is led by (a) higher
interest rates, (b) shift to CDs from mutual funds (lower income from current investments). Notably,
high other income is likely to be constrained by higher working capital and hence lower cash.
We remain skeptical on meeting aggressive inflows growth guidance of 15-20% in FY2012E
L&T management has maintained its guidance of strong revenue growth of 25% and inflow
growth of about 15-20% in FY2012E. However, we remain skeptical about the inflows target as
several challenges such as unavailability of gas, coal linkages, capex slowdown etc. may constrain
growth. Our estimates build in marginal order inflow growth of 3% and revenue growth of 21%
for FY2012E. L&T reported order inflows of Rs162 bn in 1QFY12, recording marginal 4% yoy
growth, though on an elevated base on account of Rs52 bn Rajpura order.
Revenues up 21% yoy, EBITDA margin of 11.9% (down 90 bps), PAT of Rs7.46 bn (up 12%)
L&T reported 1QFY12 standalone revenues of Rs95 bn, up 20% yoy - broadly in line with our
estimate (of Rs95.5 bn). EBITDA margin dropped 90 bps yoy to 11.9% in line with our
expectations. L&T reported 1QFY12 PAT of Rs7.46 bn versus our expectation of Rs7.7 bn and up
12% yoy from Rs6.7 bn last year.
Revise estimates and target price to Rs1,800/share (from Rs1,900); reiterate REDUCE
Revise consolidated estimates to Rs79.6 and Rs98.2 (from Rs84.8 and Rs104.3) and standalone to
Rs70 and Rs83.5 (from Rs74.5 and Rs89) for FY2012E and FY2013E based on slightly lower
margin and higher interest and depreciation expenses. We retain our REDUCE rating (TP: Rs1,800)
on potential margin pressures, relatively high expectations and valuations (17XFY12E and 14XFY13
P/E) in a weak demand environment.