Jain Irrigation Systems, Larsen and Tubro- Pre Budget Technical Stock Picks :: HDFC Securities

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Larsen & Toubro’s - Toning Down International Exposure :: Edelweiss

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Earnings weak, prospects strong L&T’s 3QFY15 stand alone results :: HDFC Securities

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Sell/Reduce L&T between CMP to Rs.1530 :: HDFC Securities

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LT Recommendation BUY ( + ) Target Price Rs. 1714 :Kotak Sec, link

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Prospects intact albeit mixed Q2FY15… • L&T :: ICICI Securities, report link

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Larsen & Toubro Ltd. |Q2FY15 Result Update | Mixed Performance :: IndiaNivesh

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Larsen & Toubro -- Value Unlocking at L&T IDPL? :: Morgan Stanley

Larsen & Toubro
Quick Comment: Value
Unlocking at L&T IDPL?


No impact on our views, based on the current
information: We would wait for more clarity on this
news. We know what the foreign investor might be
looking to put into L&T IDPL (Rs20 bn +) – but the stake
that IDPL is likely to hand out for it is not yet known.
Hence, it is not possible to judge the impact of the deal.
 If the stake ends up at less than 20%, then there
would be upside risk to our target price.
 If the stake is higher than 20%, then there would be
downside risk.
On a probability-weighted basis, at Rs110/share (Rs101
bn), IDPL is around 12% of our target price for L&T
(Exhibit 3) – the biggest chunk after the core business.
We remain on the sidelines pending more visibility
on the revival of Indian capex: An exceptional
long-term story and strong management are being offset
by near-term challenges – both macro and micro.
The first step in management’s vision – delinking
IDPL’s growth from L&T’s balance sheet: On Friday,
L&T informed the exchanges that L&T IDPL (the
subsidiary housing its infrastructure development
business) has submitted an application to the Foreign
Investment Promotion Board (FIPB) for approval of a
foreign direct investment. Due diligence is yet to be
completed and some terms of the transaction still have
to be agreed upon – but according to the company, the
investor is looking to put in an initial Rs10 bn, followed
by another Rs10bn or more in the next 12 months.
Over the next five years (F14-18e), IDPL estimates an
equity requirement of Rs82 bn (Exhibit 1), with ~75%
needed for projects now on hand. Our meeting with
IDPL management in September 2013 (for details, see
our QC of September 23) had indicated that the
company planned to raise 60% of the money from
monetization (including securitization) and 40% from
bringing equity investors into both IDPL and the
Hyderabad metro (mezzanine equity).

Larsen & Toubro :Integrated player in power segment value chain:: Motilal oswal

Integrated player in power value chain
L&T Power offers turnkey solutions for up to 1GW super critical coal-based
power plants, and has also demonstrated capability of executing BOP packages
for both subcritical and supercritical thermal projects on EPC basis. We believe
that integration in the value chain is the key competitive advantage; also given
the increasing trend of a large number of projects being awarded on EPC basis.

Larsen & Toubro (LT IN) Execution Clear Miss; Track Record Shows Revenue Recovery Potential:: Jefferies

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.

Larsen & Toubro (LART.BO) Hold Your Horses, Don’t Bottom Fish :: Citi Research

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.

Goldman Sachs, Larsen & Toubro : Macro catching up; still prefer the bellwether

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.

Larsen & Toubro: Buy :Business Line

Larsen & Toubro -Guidance aggressive; valuation fair ■ Credit Suisse

Guidance aggressive; valuation fair
■ Expect margin pressures to continue. Led by a slowdown in industrial and
infra capex in India, we expect L&T to source 40% of its FY14/15 order flows
from the Middle East (M-E) and real estate segments. Four factors lead us
to believe that this should impact its margins: (1) historically L&T’s margins
have fallen with a rising share of orders from these segments, (2) real estate
orders are prone to delays, have a longer debtor cycle and impact PBT
margins, (3) its M-E entities have historically earned just 5-8% margins, and
(4) Korean E&C majors, with high M-E exposure, too, face margin pressures.
■ Order flow growth guidance likely to be missed. Based on our bottom-up
analysis, we expect L&T to deliver 11% (vs. guidance of 20%) order flow
growth during FY14. We believe at least 50% of its order flows are from
business segments that are impacted from sector-specific issues; which are
unlikely to be resolved soon. Thus, contrary to the common perception, an
expected easing in the interest rate cycle is unlikely to result in any
meaningful recovery of the investment cycle, in our view.
■ L&T has a poor track record of meeting its guidance. Over the past
decade, L&T has disappointed on at least two out of three parameters of its
guidance for seven years. Its margin guidance has mostly been missed.
Over the past few years, its guidance at the start of the year has been driven
by the hope of a capex recovery. This has proven optimistic leading to the
guidance revised down during the year.
■ But valuation derating likely to be gradual. L&T trades at 14x one-year
forward standalone earnings which appears expensive for muted 10% EPS
CAGR over FY13-15E. But, we believe its derating is likely to be gradual as
it would take time for the deteriorating order book mix to translate into weak
earnings. But, we do not rule out the possibility of few more orders turning slowmoving or dormant, which could lead to a stock correction. Maintain NEUTRAL.

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

L&T -Orders galore, assuage margin miss :: JPMorgan

Overcoming odds of a weak domestic investment cycle L&T managed to secure
an uphill 25% growth in FY13 order inflows. In an election year for India, they
surprised positively by guiding to 20% order inflow growth in FY14, implying
expectation of booking Rs1056bn (USD19bn) fresh jobs. Transportation
infrastructure jobs both in India and overseas are expected to swing the needle on
order inflows through FY14. Taking FY14 revenue guidance of 15%-17% growth
at face value in conjunction with inflows, the implied growth in order backlog this
fiscal works out to ~22%, improving prospects on even better topline growth in
FY15 vs. current fiscal. Post the Mar-q margin and topline miss (see First cut post
results) simply following guidance would imply ~6% lower FY14 standalone
EBITDA, though the EPS downside is more muted if lower average tax-rate of
29% over FY12/FY13 is built into FY14 (current JPM est. of 33% tax-rate).

Technicals- TCS, L and T, Jindal Steel, Vascon Engineers, Wendt, Tide Water Oil, :: Business Line

L & T:: TP: INR1,734 Buy: Overseas juggernaut: 1.5-2% market share in ME ::Most

Overseas juggernaut: 1.5-2% market share in ME
Circumspect about nature of project wins, near-term margins at risk
 Since our thematic report on Larsen and Toubro (LT), 'Gearing up the overseas
juggernaut' in November 2012, the overseas business is now expected to contribute
39% of consolidated earnings in FY14E (v/s 32% earlier).
 Initial success has been encouraging, with LT being part of the pre-qualified bidding
consortiums in metro, railway, road and hydrocarbon projects. Possible order intake
of INR200b in FY14E from the overseas markets will entail a market share of ~1.5-2%
in Middle East ordering (based on recent aggregate ordering trends).
 We remain circumspect about profitability in overseas orders due to likely poor fixed
cost absorption and learning curve, associated with new geographies/ segments.
 Maintain Buy and believe triggers still exist to accumulate the stock on declines.

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.

JPMorgan:: Larsen & Toubro :: Eyeing international opportunities to overcome domestic deficit

In our meeting with L&T management, we sensed skepticism on the domestic
capex cycle and focus on ramping up share of international business. As per
management, a fresh investment pickup in domestic thermal generation will
take another two years. In the near term, India road sector outlook remains
muted (though past the bottom, in our view). Domestic B&F and T&D
inflows for L&T in FY14E are likely to be flat on a high base in the current
fiscal year. The hydrocarbons space continues to be very competitive, as per
management. These inputs serve to corroborate our views (see our 5th Mar
report). The international opportunity that L&T is eyeing assumes more
significance than ever before, given likely delays in recovery of the domestic
capex cycle.
 L&T in consortium with international players has placed bids for a
portion of ~US$30B of Middle East infrastructure projects, we estimate
L&T's share of the bid opportunity at US$3.5B. L&T has bid for two
metro projects (Doha & Riyadh - US$7-8/B each), the Etihad railway
project (US$11B) connecting all the seven Emirates and a 265km road
project in Oman (~US$2.6B) as part of international consortiums. The
number of bidders goes up to 10-15 for the road and railway projects,
whereas the metro projects have 4-8 pre-qualified consortia with more
members (see details inside the report). As per L&T, EBITDA margins on
the Middle East infra projects could typically be 200bps lower than similar
projects in India.
 Making the best of the domestic deficit, but paying for deferment of
opportunities. L&T is a part of one of the two consortiums that have been
pre-qualified for the first package (US$1.2-1.4B) of the western freight
corridor. L&T continues to maintain its positive stance on the metro rail
opportunity in India. We expect a substantial portion of Delhi Metro-III
(US$6.5bn) and Kochi metro (US$1bn) to be awarded through FY14.
Deferment of domestic order opportunities in defense and nuclear, come at
a cost for L&T. Recently commissioned Katupalli shipyard and Hazira
forging unit involved combined capex of ~US$800mn and could remain
underutilized adding to interest burden at consolidated level.
 Near term, we expect fresh order announcements: With only ~Rs34bn
orders reported so far in Mar-q, time is running out for L&T to inspire
confidence in traditionally strong Mar-q inflows (Rs230bn JPM est).