L&T’s 1QFY14 results came in below expectations given weak execution.
Revenues surprisingly rose by only 5% YoY, v/s expected 10% YoY and FY14E
expectation of 15% YoY. Management has maintained guidance and attributed
miss to quarterly EPC revenue fluctuation. This volatility has reflected in past
years like FY11 also. We maintain our earnings and TP as strong order flow (up
28% YoY) lends credibility to revenue recovery.
Order flow rises by 28% YoY in 1Q: L&T’s domestic order flow has risen by 20% YoY
and augurs well for domestic revenue recovery as the year progresses. Sector-wise, strong
growth in infrastructure and hydrocarbon offset the decline in power and capex linked
process sector. Given annual expectation of 15% YoY growth, factoring order flow growth
of 1Q, 11% YoY growth is required over the next 3 quarters.
Execution disappoints: L&T’s revenues surprisingly rose by only 5% YoY during the
quarter to Rs126 bn, v/s expectation of 10% YoY growth. This led to the PAT miss, and also
concerns on potential of meeting full year expectations of 15% YoY growth. Management
highlighted that quarterly fluctuations in booking E&C revenues led to the miss, and
is confident of compensating for the same as the year progresses. Guidance has been
maintained. Interestingly, such volatility has been seen in past years also. For example in
FY11, 1Q revenue growth was just 6% YoY, but L&T went on to report 19% YoY revenue
growth in full year FY11 (Exhibit 2). FY07-08 were also similar such years. This in tandem with
strong order flow growth and 22% YoY order book growth, adjusted for 4Q cancellations
lends credibility to revenue recovery (Exhibit 3).
Margins expected to be maintained in FY14E: L&T’s margins, adjusted for forex (Rs1.1
MTM on loans) has broadly come in-line with expectations. Management has maintained
its full year guidance of maintaining the same. As revenue recovers in the course of year,
margin uptick will lead to the company maintaining margins on full year basis.
Valuation/Risks
Risk:reward favourable: In all the surrounding scepticism, L&T is now trading at 1.8x
P/B FY14E (adjusted for subsidiary valuations). While it may seem distant today, we believe
the company’s ability to manage order flow and earnings through the downturn will see
multiple re-rate over the next 12 months. We maintain Buy with a TP of Rs1,270 valuing the
core business at 18x PE FY14E – 10% discount to 10-yr mean. Key risks include: 1) Extensive
price competition; 2) slowdown in Middle East.
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Revenues surprisingly rose by only 5% YoY, v/s expected 10% YoY and FY14E
expectation of 15% YoY. Management has maintained guidance and attributed
miss to quarterly EPC revenue fluctuation. This volatility has reflected in past
years like FY11 also. We maintain our earnings and TP as strong order flow (up
28% YoY) lends credibility to revenue recovery.
Order flow rises by 28% YoY in 1Q: L&T’s domestic order flow has risen by 20% YoY
and augurs well for domestic revenue recovery as the year progresses. Sector-wise, strong
growth in infrastructure and hydrocarbon offset the decline in power and capex linked
process sector. Given annual expectation of 15% YoY growth, factoring order flow growth
of 1Q, 11% YoY growth is required over the next 3 quarters.
Execution disappoints: L&T’s revenues surprisingly rose by only 5% YoY during the
quarter to Rs126 bn, v/s expectation of 10% YoY growth. This led to the PAT miss, and also
concerns on potential of meeting full year expectations of 15% YoY growth. Management
highlighted that quarterly fluctuations in booking E&C revenues led to the miss, and
is confident of compensating for the same as the year progresses. Guidance has been
maintained. Interestingly, such volatility has been seen in past years also. For example in
FY11, 1Q revenue growth was just 6% YoY, but L&T went on to report 19% YoY revenue
growth in full year FY11 (Exhibit 2). FY07-08 were also similar such years. This in tandem with
strong order flow growth and 22% YoY order book growth, adjusted for 4Q cancellations
lends credibility to revenue recovery (Exhibit 3).
Margins expected to be maintained in FY14E: L&T’s margins, adjusted for forex (Rs1.1
MTM on loans) has broadly come in-line with expectations. Management has maintained
its full year guidance of maintaining the same. As revenue recovers in the course of year,
margin uptick will lead to the company maintaining margins on full year basis.
Valuation/Risks
Risk:reward favourable: In all the surrounding scepticism, L&T is now trading at 1.8x
P/B FY14E (adjusted for subsidiary valuations). While it may seem distant today, we believe
the company’s ability to manage order flow and earnings through the downturn will see
multiple re-rate over the next 12 months. We maintain Buy with a TP of Rs1,270 valuing the
core business at 18x PE FY14E – 10% discount to 10-yr mean. Key risks include: 1) Extensive
price competition; 2) slowdown in Middle East.
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