Larsen & Toubro (LART.BO)
Buy Equity Research
Below expectations: Macro catching up; still prefer the bellwether
What surprised us
L&T reported 1Q14 stand-alone results with sales of c.Rs126bn (+5% yoy)
9%/7% below GS/Bloomberg consensus estimates. EBITDA margin of 8.5%
declined c.60bps yoy (120bps adjusted for forex) led by higher employee
expenses and unfavorable job mix in hydrocarbons. PAT of Rs7.6bn (-12%
yoy) also missed GS/consensus estimates by 17%/18% due to lower other
income. Order inflows at Rs252bn, however, exhibited strong growth
(+28% yoy), resulting in a strong order backlog of Rs1.65tn (+6% yoy). The
company kept its revenue growth guidance (+15-16%) and inflow (+20%)
unchanged, with a much improved 2H execution of current book.
What to do with the stock
With a persistently slow macro, tough credit, and a prolonged approval
cycle, execution pressure is visible in the results. Higher proportion of
overseas revenue at 26% and negative operating leverage due to
underutilization of resources has impacted margins. Given we expect such
conditions to continue in the short term, we take comfort from (1) L&T’s
order book coverage of 2.4X FY14E revenue, providing visibility on growth
(we estimate FY13-15E CAGR of 16%; (2) L&T’s strong balance sheet to
help provide stability to earnings vs. other more levered infrastructure
peers; and (3) benign raw material prices to support margins, especially in
overseas contracts. We adjust down our FY14-16E EPS by 6% on lower
growth from the Power segment and lower margins. Our 12-month SOTPbased target price thus falls to Rs1056 (from Rs1120), implying 17%
upside. The stock is trading at 15.2X and 2.1X 12m forward P/E and P/B, at
a 24% and 45% discount to its 7-year historical multiples. We view this as
attractive and maintain Buy. Key downside risks: Aggressive bidding,
longer-than-expected delay in order inflow pick-up, higher interest rates.
��
Buy Equity Research
Below expectations: Macro catching up; still prefer the bellwether
What surprised us
L&T reported 1Q14 stand-alone results with sales of c.Rs126bn (+5% yoy)
9%/7% below GS/Bloomberg consensus estimates. EBITDA margin of 8.5%
declined c.60bps yoy (120bps adjusted for forex) led by higher employee
expenses and unfavorable job mix in hydrocarbons. PAT of Rs7.6bn (-12%
yoy) also missed GS/consensus estimates by 17%/18% due to lower other
income. Order inflows at Rs252bn, however, exhibited strong growth
(+28% yoy), resulting in a strong order backlog of Rs1.65tn (+6% yoy). The
company kept its revenue growth guidance (+15-16%) and inflow (+20%)
unchanged, with a much improved 2H execution of current book.
What to do with the stock
With a persistently slow macro, tough credit, and a prolonged approval
cycle, execution pressure is visible in the results. Higher proportion of
overseas revenue at 26% and negative operating leverage due to
underutilization of resources has impacted margins. Given we expect such
conditions to continue in the short term, we take comfort from (1) L&T’s
order book coverage of 2.4X FY14E revenue, providing visibility on growth
(we estimate FY13-15E CAGR of 16%; (2) L&T’s strong balance sheet to
help provide stability to earnings vs. other more levered infrastructure
peers; and (3) benign raw material prices to support margins, especially in
overseas contracts. We adjust down our FY14-16E EPS by 6% on lower
growth from the Power segment and lower margins. Our 12-month SOTPbased target price thus falls to Rs1056 (from Rs1120), implying 17%
upside. The stock is trading at 15.2X and 2.1X 12m forward P/E and P/B, at
a 24% and 45% discount to its 7-year historical multiples. We view this as
attractive and maintain Buy. Key downside risks: Aggressive bidding,
longer-than-expected delay in order inflow pick-up, higher interest rates.
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