J. P Morgan - Larsen & Toubro

Amid a weak investment cycle, a strong order inflow performance and growth
outlook affords superior medium term earnings visibility for L&T compared to its
peers. Margin worries have intensified post the 4Q miss but favorable commodity
price trends, revenue mix and benefits of a stable working capital cycle might be
getting overlooked in our view. Our revised Mar-14 SOP PT of Rs1,635 (vs.
Rs1,650 earlier) includes value for parent business at 13.5x FY15E EPS. Reiterate
OW. We provide food for thought on key parameters in this report

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 On fresh orders. Domestic order inflows grew by a healthy 26% in FY13,
ahead of the 18% growth in export jobs. It was a bit counter intuitive that in
FY13 inflow growth was actually led by the power segment. We attempt a
break-up of L&T's Rs1,056bn (up 20%) order inflow guidance for FY14. The
current year could see ~Rs235bn of export orders (implying 58% growth),
largely getting a push from wins in big-ticket ME infrastructure opportunities.
In India incremental push in inflows may come from DFC, metro, and initial
orders in defense and shipbuilding.
 On execution. In FY13 revenue recognition on domestic orders grew a sedate
4%. With a 3x book-bill for the India backlog, we see domestic revenue growth
accelerating to ~11% and standalone revenue growth at 15% in FY14. Strong
order flow performance in FY13 and 20% growth outlook for FY14 affords an
improvement in revenue growth trajectory for FY15 (JPMe 17%).
 On margins. Our base case is that L&T will be able to deliver flat margins in
FY14. We believe that the 4% and 7% yoy declines in cement and domestic
steel prices over the last few months, acceleration in domestic revenue growth
and depreciating INR for a net-exporter, will be enough to offset potentially
lower margins on export orders.
 On working capital. With interest rate trajectory leaning downwards, we
expect a stable NWC through FY14. The deterioration in FY13 was less than in
FY12. In 4QFY13 NWC/sales improved ~100bps to 16%.
 On cash flows. Standalone operating cash flow grew a noteworthy 56% in
FY13, and we estimate easing working capital pressures will see 59% growth in
FY14. We expect a significant rise in capex run-rate on developmental projects
to Rs74bn in FY14 vs. Rs48bn in FY13. Given long gestation period of BOT
concessions, equity infusion via stake sale to strategic investors is required in
developmental business to reverse consolidated RoCE deterioration

Price target and valuation analysis
Our SOP based Mar-14 PT of Rs1,635 (vs Rs1,650 earlier) includes
Rs1,172 for the parent company (based on DCF, implying 13.5x FY15E
adj EPS) and Rs545 for subsidiaries and associates with large
contributions from development projects, L&T Finance Holdings and
L&T Infotech. We have maintained 15% conglomerate discount for
Subsidiaries & Associates.

Risks to our price target
Key downside risks include:
(1) Delay in policy action to boost business confidence and revive
investment cycle, slow moving orders could increase; (2) Weak overseas
orders with significantly lower margin
Upside risks include: Value unlocking from churning of mature assets in
the developmental project portfolio could free up equity required from
under construction projects and arrest the extent of decline in profitability,
in our view.

Thoughts on fresh orders
The year gone by: FY13 order inflow growth led by domestic and power sectors
In FY13 L&T reported order inflow of Rs880bn up ~25% YoY. Amidst a depressed
domestic investment cycle, it is important to note that growth was actually led by
domestic order inflows (up 26.3%) rather than exports (up 17.8%).
It was quite counter-intuitive that the fastest growing segment for order inflows in
FY13 was actually power, contributing 30% of inflows and up 78% YoY. FY12 was
a trough year for power as no BTG order was booked (unlike FY13 which included
Rs57bn turnkey 1320MW Rajasthan order). T&D jobs in India and Middle East
(ME) too seem to have boosted order booking in power.
Ex-power in FY13 order inflows grew by 10.5%. Within infrastructure, orders for
commercial and residential buildings and factories led the growth.
Uncategorized/other orders grew by 25% YoY to Rs79bn mainly led by growth in
technology services, electrical and electronics and construction and mining
equipment, in our assessment.
L&T lost a few hydrocarbon opportunities both in India and overseas to
competition with narrow margin, as per management. They had hoped earlier to bag
well over Rs100bn orders in hydrocarbon segment in FY13.L&T management now
plans to bid for US$3bn of Middle East hydrocarbon orders in FY14 expecting a
market share of 10-24%, given the dearth of domestic opportunities. (Source:
Economic Times)