We met up with L&T management recently and came back positive on its medium to long term business potential and new business initiatives.
RoCE improvement in focus; aims to leverage new capacities
L&T targets to achieve an improvement in RoCEs over next 2-3 years by exiting non-core businesses which are not scalable, value unlocking in select developmental projects and optimizing the current manufacturing base in ship-building, defense, heavy forgings and power equipment. L&T expects to utilize its upcoming shipyard for both defense and commercial vessels, and is eyeing improved ordering from FY14E. It currently has INR15bn worth of order book in this segment. In switchgears, L&T has incurred capex for new switchgears plant (at Baroda) and new control panel plants (LV & MV) at Ahmednagar and Coimbatore which will help reduce overall costs and arrest margin decline in the EBG business.
Growth guidance reiterated; no major capex incrementally
L&T has guided for a 15%-20% growth in OI and 15% growth in revenue for FY13E (which the management hopes to maintain as of now). Outlook for hydrocarbons, power T&D, railways, etc remains healthy, adding to near term order book growth visibility. The company has incurred INR70bn+ in the last 2-3 years for building manufacturing capabilities in power equipment, forgings, ship-building etc hence does not expect any fresh capacity addition incrementally other than maintenance capex.
Outlook and valuations: Positioned for growth; maintain ‘BUY’
Our recent visit to the company boosted our confidence on the order intake and earnings growth outlook in the near to medium term. Order inflows in power EPC, ship-building, defense and heavy forgings would help L&T reposition itself over the long run. Any major traction on the policy front clearly poses a major upside risk to our growth assumptions for FY13E-14E. We reiterate our positive stance on L&T for its long term positioning in the industrial and infrastructure space, scalability of current businesses and the sustained focus on profitability. We maintain our BUY/SO rating with a revised TP of INR 1587 (earlier -1528). We maintain our parent valuation at INR1278/share.
Regards,
No comments:
Post a Comment