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).

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 Need to overcome execution pressures at home, though export performance
mellows down ask. L&T’s 14.5% topline growth in FY13 was driven by a near
doubling of overseas sales (now 20% of topline), while domestic growth was a
sedate 3.8%. Management attributed this to customer-end issues, fuel/clearance
bottlenecks at home and timing of revenue booking on large orders. With
management expectation of almost doubling overseas inflows in FY14 to
Rs250bn, L&T would still need to clock ~10% domestic sales growth in FY14
to meet 15-17% standalone topline growth guidance. In an as-is scenario where
ground level issues persist, even the modest ask could prove challenging.
Management action of stripping out Rs170bn non-moving orders from the
backlog while giving guidance for FY14, affords us more confidence.
 The margin debate. After the 4Q margin miss and rising share of overseas
revenues (~25% by FY14), guidance of stable margin in FY14 is likely to
remain under intense scrutiny. As an often repeated illustration by management
during the analyst meet, an overseas job of like scope to a domestic order,
contributes 2.5x to topline on relative basis. Even with ~200-250bps lower
overseas margin, L&T can manage a similar RoCE as local jobs given resource
mobilization required overseas would not be as high as accretion to revenue.
We maintain OW. Yesterday's 5.6% stock correction captures Mar-q
disappointment. Order performance & outlook in adverse environment affords
superior medium term growth visibility for L&T, in relation to peers with
significantly lower scale and diversification, in our view. Key analyst meet
takeaways are highlighted inside the report