Larsen & Toubro (LART.BO)
Hold Your Horses, Don’t Bottom Fish
What bothers us? — Over the next 2 years if standalone sales grow 12-15%, margins
contract 100bps given internationalization drive, bottom-line growth would be < 10%
(ex dividends from S&A companies). How much loss could Gujarat roads, shipyard &
forging facilities contribute in FY14E when they run for the full year? When will Rajpura
& Hyderabad Metro come online (FY15E, 16E or 17E) and what will be the quantum of
losses in initial years? Will finance/ IT subsidiaries’ growth negate the impact of the
above subsidiaries? Are our consolidated estimates too aggressive?”
Disappointing 1Q — L&T’s Recurring PAT at Rs7.6bn -15% YoY was 25% below Citi
on tepid +5% sales growth, 56bps margin decline and lower other income. Inflows were
strong at Rs252bn +28% YoY resulting in backlog growth of +8% YoY (post order
cancellation of Rs6bn). The QoQ spike up in working capital and debt is worrying.
View on sales growth post 1Q — Adjusting for slow moving orders, underlying
backlog growth in FY13 was 11%, which is what L&T should achieve as sales growth in
FY14E (unless execution cycle changes). Pre 1QFY14 we gave L&T the benefit of the
doubt and assumed +15% sales growth. We take that down to 12% now.
View on margins post 1Q — 1Q EBITDA margins were -56bps YoY. Adjusted for MTM
on loans they were -104bps. We assume margins would contract 50bps (vs. 30bps pre
1Q) in FY14E and 50bps (vs. 30bps pre 1Q) in FY15E. We are more worried about
FY15E given plans to increase international inflows from FY13 - 17% to FY14E - 24%.
View on inflows post 1Q — Achieving the inflow guidance is not impossible and is a
function of the inflows vs. margins compromise. We assume +15% in our estimates.
Maintain Neutral - Target price cut to Rs1,007 — To factor in consolidated and
parent EPS cut of 7-8% and 5-9% respectively (on 3% lower sales, 22-42bps lower
margins and change in subsidiary estimates), roll forward of target P/E to Dec14E and
lower parent multiple of 14x on a deteriorating operating environment.
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Hold Your Horses, Don’t Bottom Fish
What bothers us? — Over the next 2 years if standalone sales grow 12-15%, margins
contract 100bps given internationalization drive, bottom-line growth would be < 10%
(ex dividends from S&A companies). How much loss could Gujarat roads, shipyard &
forging facilities contribute in FY14E when they run for the full year? When will Rajpura
& Hyderabad Metro come online (FY15E, 16E or 17E) and what will be the quantum of
losses in initial years? Will finance/ IT subsidiaries’ growth negate the impact of the
above subsidiaries? Are our consolidated estimates too aggressive?”
Disappointing 1Q — L&T’s Recurring PAT at Rs7.6bn -15% YoY was 25% below Citi
on tepid +5% sales growth, 56bps margin decline and lower other income. Inflows were
strong at Rs252bn +28% YoY resulting in backlog growth of +8% YoY (post order
cancellation of Rs6bn). The QoQ spike up in working capital and debt is worrying.
View on sales growth post 1Q — Adjusting for slow moving orders, underlying
backlog growth in FY13 was 11%, which is what L&T should achieve as sales growth in
FY14E (unless execution cycle changes). Pre 1QFY14 we gave L&T the benefit of the
doubt and assumed +15% sales growth. We take that down to 12% now.
View on margins post 1Q — 1Q EBITDA margins were -56bps YoY. Adjusted for MTM
on loans they were -104bps. We assume margins would contract 50bps (vs. 30bps pre
1Q) in FY14E and 50bps (vs. 30bps pre 1Q) in FY15E. We are more worried about
FY15E given plans to increase international inflows from FY13 - 17% to FY14E - 24%.
View on inflows post 1Q — Achieving the inflow guidance is not impossible and is a
function of the inflows vs. margins compromise. We assume +15% in our estimates.
Maintain Neutral - Target price cut to Rs1,007 — To factor in consolidated and
parent EPS cut of 7-8% and 5-9% respectively (on 3% lower sales, 22-42bps lower
margins and change in subsidiary estimates), roll forward of target P/E to Dec14E and
lower parent multiple of 14x on a deteriorating operating environment.
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