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

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Earnings weak, prospects strong L&T’s 3QFY15 stand alone results were below estimates as both revenue growth (4% vs. est. 10%) and OPM (10.5% vs. est. 11.6%) disappointed. Consolidated revenue growth (ex services and development business) was also weak at 8%. Despite sluggish revenue growth (standalone) of 6% in 9MFY15, EBITDA margin has expanded by 100bps to 11.3% due to benign inflation and higher contribution from realty business. While there has been no pick up in revenue growth, management mentioned that order inflow prospects are very strong at Rs 1.5tn, imparting high visibility to a growth recovery in FY16/17E. We change our revenue growth and OPM estimates but our earnings estimates are largely unchanged. Retain Buy with a marginally revised TP of Rs 1,725/sh (from 1,722) based on sum of 18x FY17E standalone EPS and Rs 356/sh for subs.  3QFY15/9MFY15 consolidated order inflow of Rs 346/1,078bn was up 19/16% YoY. Management has maintained its guidance of 15-20% inflow growth and 10-15% revenue growth for the consolidated entity. Ex services business, order inflow for 3Q/9MFY15 was Rs 275/938bn, up 8/13% YoY. Hydrocarbon business continued to report weak numbers with an EBITDA loss of Rs 860mn for 3Q. Management expects losses to continue for FY15 as cost overruns have not been fully absorbed.  Operating margin for the standalone business came in at 10.5% (down 117bps YoY) and lower than our estimate of 12.8%. Margins for 3Q/9M have been sustained with the aid of realty business. For the consolidated entity management has reduced its margin guidance to 10% vs. 12%+/-100bps earlier.  To factor in slower pick up in revenue growth, benign inflationary trends and higher contribution from realty, we change our FY15/16/17E standalone revenue growth assumption to 7/12/20% from 10/15/18% and increase our OPM estimate to 12.6/12.7/12.9% vs. 12.0/12.2/12.4% earlier.  We expect investment climate to revive gradually as government takes actions to ease execution and opens up new sectors like defence and railways for private investment. L&T, with its diversified presence, stands to gain meaningfully from these initiatives, near term weakness notwithstanding. Retain BUY.

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