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Action
We revise up our price target for L&T to INR2,310 (from INR 2,080) on a 7%
revision in FY12F EPS and an increase in subsidiary valuations. With order backlog
at an all-time high of 2.96 and execution picking up in long-gestation projects, we
believe growth is set to accelerate over the next 12-18 months. Operating leverage
is expected to increase margins further. Maintain BUY.
Catalysts
News flow on new order wins, margin expansion, value unlocking of subsidiaries
and a further pick-up in execution starting 2H FY11F.
Anchor themes
L&T offers exposure to the anticipated pick-up in infrastructure investment and
corporate capex. The company participates in various infrastructure and corporate
capex segments. Unparalleled scale and capabilities among Indian contractors is a
key advantage for L&T, in our view.
Set to deliver
Growth rate set to accelerate
With order backlog at an all-time high of 2.96 and execution picking
up in long-gestation projects, we believe L&T’s growth is set to
accelerate over the next 12-18 months. We expect the company to
deliver 25%+ revenue growth in 2H FY11F and FY12F. Furthermore,
a positive surprise cannot be ruled out, in our view.
Upward bias on margin
With acceleration in revenue growth, operating leverage is likely to
play out further. In 1H FY11, the EBITDA margin expanded 80bps y-y,
and for FY11F, we expect margins to expand vs FY10. Further, a
rising contribution from development projects could also benefit
margins over the medium to long run, in our view.
Increasing earnings estimates by 2-7%
We are revising our earning estimates by 2% and 7% for FY11F and
FY12F, respectively. The increases largely reflect our higher EBITDA
margin assumptions.
Raising subsidiary valuation
We raised our subsidiary valuation to INR449/sh from INR319/sh
previously. The increase primarily reflects higher valuation of L&T
Finance Holdings (2.5x FY12F book vs.1.5x earlier), which is largely
in line with its peer group (based on Bloomberg consensus). We also
increased the valuation of L&T IDPL, as we factor in higher growth in
the portfolio, valuation of power projects and a PE stake purchase.
Price target raised to INR2,310; maintain BUY
We value the standalone business at 22.5x FY12F and subsidiary at
INR449/sh to arrive at a new PT of INR2,310 (was INR2,080, up 11%).
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