LARSEN & TOUBRO Delivers on Headline number; Core profitability weak:: :: Edelweiss

L&T reported numbers on expected lines with revenues showing a rise of
10 % YoY and PAT, up 13% YoY, primarily aided by `higher’ other income.
Order intake came in better than expected at INR 195bn, which was up
14% YoY. EBIDTA margins dropped 90bps YoY to 10.3 % (adj for MTM
forex loss), led by sharp growth in export revenues where LT executed
low margin projects. The management appeared positive wrt future
ordering momentum; they maintained revenue and OI guidance at 15-
20% for FY13E. Maintain BUY/SO rating for LT with a TP of INR 1941.
Revenues in line; higher other income buoys PAT
L&T reported revenues and bottom-line were on expected lines, although PAT was
aided by other income which came in at INR 5.7bn (up 18 % YoY, owing to INR 2.7bn in
property sales). The management cited higher input cost as the key reason for a 90 bps
YoY dip in EBIDTA margins, which we believe is largely attributed to higher component
of export sale(up 144% YoY; 23% of Q3 sales). Segmental margins dropped for E&C
(110 bps led by input cost pressure and job mix) and MIP division (310bps led by weak
industrial and mining volumes), while EBG margins improved (+340 bps YoY led by
improved pricing and new products like switchboard in Middle East market etc)
Banking on infrastructure recovery; Retain FY13E guidance
Management expects to maintain FY13E revenue and order intake guidance of 15-20
%, on the back of sustained pace of project execution and traction in Hydrocarbon,
Power (T&D + Generation EPC), Railways and infrastructure segment. L&T needs INR
210-250 bn orders in 4Q to meet lower and higher band of OI guidance.
Outlook and valuations: Retain conviction; maintain ‘BUY’
We maintain our thesis that L&T is the best play on domestic industrial and
infrastructure recovery with sustained competitive and scalability advantage that
separates it from the rest. While we expect L&T to meet FY13E growth guidance, sale
of non-core business and revival of non-infrastructure businesses over next 2-3 years
would be key value drivers. We maintain BUY/SO rating for L&T with our SOTP of INR
1941, implying a 19.8x PE(FY05-12 avg) for the standalone entity. The stock currently
trades at a P/E of 18.8x &16.1x its FY13E & FY14E earnings respectively on a consol
basis. We further introduce our FY15E numbers through this update.

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