Operating performance below expectations: While Larsen and Toubro's (LT)
operating performance for 3QFY13 was significantly below expectations, the
key positives are continued strong order inflows (INR195b; up 14% YoY) and
positive cash flow from operations. Adjusted EBITDA margin declined 84bp
YoY in 3QFY13, impacted by lower sales and poor fixed cost absorption.
Adjusted net profit declined 7.8% YoY to INR10.4b (below our estimate of
INR11.4b).
Order intake - key positive surprise: Order intake at INR195b (up 14% YoY), in
line with the quarterly run-rate of INR200b during the last four quarters,
supported by robust 22% contribution from overseas business (v/s 23.7% in
2QFY13), surprising positively as the announced order intake (through press
releases) was just INR98b. Management mentioned about improving order
pipeline while strategy on overseas business seems to be playing out.
E&C revenue moderated due to slower order inflow during FY12: E&C revenue
in the domestic market declined 6.2% in 3QFY13 against 13.3% growth in
1HFY13 due to (1) sluggish order inflow during FY12 , impacting execution
with a lag of ~4 quarters, (2) passing of peak execution of large hydrocarbon
orders in the domestic E&C business, (3) increasing share of slow moving
orders (largely domestic) from 10% in mid-FY12 to ~14% now.
Management maintains FY13 guidance: The management maintained its
guidance of 15-20% growth in revenue/order intake and +/-50bp change in
E&C EBITDA margin in FY13.
Valuation and view: We maintain Buy with a revised SOTP-based target price
of INR1,870 (18% upside). We value L&T standalone at 14x FY15E earnings and
subsidiaries at INR377/share.
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