Larsen & Toubro: Flurry of orders helps enhance visibility ::Kotak Sec

Larsen & Toubro (LT)
Industrials
Flurry of orders helps enhance visibility. Strong spurt of orders (Rs183 bn) in 4Q with
potential for 3 large additional orders (DFCC, O&G in ME, solar) enhance visibility. We
continue to build flat FY2014E inflows, balancing opportunities in power, DFC and overseas
with election-year hiccups. Margin remains key medium-term risk though relatively small
ME exposure and preeminent position in India can help sustain margins. Retain ADD on
the back of reasonable valuations on cautious estimates and strong core business returns.

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Strong recent inflows reduce near-term risk; expect flat FY2014E inflows, partly on elections
L&T has announced strong inflows (Rs183 bn) in 4QFY13E (led by large power EPC order), enhancing
near-term visibility; this enables it to meet/marginally beat its inflow growth guidance of 15-20%.
Furthermore, L&T is also set to bag 3 large orders of (Rs110 bn cumulatively): (1) Rs43 bn upstream
order from Saudi Aramco, (2) Rs21 bn 300 MW solar power plant and (3) Rs40-45 bn for western
freight corridor with Sojitsu. We build relatively flat FY2014E inflows as we balance election-year blip
with opportunities in DFCC, power, overseas, etc. There seems to have a quarterly blip just around
election time (in past two instances though data could be vitiated by financial crisis, Mar-Jun 2009).
Domestic needs to lead FY2014E execution as overseas plateaus before backlog builds up further
Domestic business did not contribute to revenue growth in 9MFY13 (driven by exports, up 2.5X
yoy). Incrementally, in FY2014E growth would have to be led by domestic business, as exports exit
backlog (Rs200 bn) is unlikely to drive a revenue growth beyond 10-12% (revenues of ~Rs120 bn).
We build 15% revenue growth and further 50 bps dip in margin to 10.5% in FY2014E. Revenue
estimate implies Rs500 bn domestic execution—reasonable on a Rs1.2-1.3 tn backlog adjusted for
slow-moving orders.
Return target of 20% is a worthy aim; needs several levers to click together, including core returns
L&T is aiming for consol returns of 20% (16% in FY2012), though task is challenging and nearterm
direction may be down rather than up on already committed investments and start of several
projects (roads, shipbuilding, forging likely to contribute negatively in the near term). Core
business returns remain strong (20%+ adjusted RoCE) but may face pressure from margin and
working capital. IDPL stake sale per se may help but only partially on a large equity base (Rs422 bn)
versus transaction size (Rs25 bn).
Marginally revise estimates; retain ADD with a revised target price of Rs1,625/share
We revise our standalone estimates to Rs77.7 and Rs79.7 (from Rs76.4 and Rs78.3) and consol
estimates to Rs80.7 and Rs80.3 (from Rs79.1 and Rs78.5) for FY2013E and FY2014E.
Retain ADD (TP: Rs1,625 from Rs1,525 on earnings revision and rollover) on (1) reasonable
valuations on relatively conservative estimates, (2) strong inflows providing near-term visibility, (3)
core business still generating strong returns and (4) some visible macro improvement.
Margin is a key medium-term risk but preeminent position in Indian EPC business (largely protected
from global competition) may help sustain margins. ME business may be margin dilutive (though may
not be returns dilutive on lower capital requirements) but is still relatively small versus overall business.