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Larsen & Toubro Ltd. (LT) - Visit Note - Dated - March 19, 2013




Axis Capital Limited


19 Mar 2013





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We met the management of L&T. Key takeaways:  FY14 order inflow outlook remains robust…Railways, Oil & Gas and large Infra projects in the Middle East to be key drivers for FY14. While the management did not guide for FY14, we expect 15% growth.  …but revenue growth to be lower: Management expects execution to pick up in H2 while H1 will also be impacted by high base (21% growth in H1FY13). Hence we reduce our FY14E revenue growth to 12% from 16% (14% in FY13E).  Management believes E&C margin has hit a bottom in FY13 (at 12.4% vs. 13.2% in FY12) and expects the level to be maintained in FY14. However, we expect FY14 E&C margin to contract by 60 bps on adverse mix. Meeting FY13 inflow guidance contingent on Rs 95 bn worth L1 orders materializing: L&T requires Rs 200 bn worth of orders in Q4 to achieve the lower-end of its FY13 guidance of 15-20% growth. In Q4 till date, it has announced orders worth Rs 40 bn and past run-rate for small unannounced orders is Rs 30-50 bn. L&T is L1 (lowest bidder) in orders worth Rs 95 bn. Asset sales may trigger rerating: Management reaffirmed it will not take additional BOT assets (30% of consolidated capital employed) in line with its asset light strategy. However, it did not confirm recent media reports indicating sale of Dhamra port, sale of construction equipment business, and 20% equity dilution in its subsidiary Infrastructure Development Projects Ltd. We believe cash flow from asset sales will lead to lower investments by L&T into IDPL and thus result in higher RoCE. Valuation: We reduce our FY14/FY15 EPS estimates to Rs 78/ 92 from Rs 87/ 100 earlier to factor in lower revenue growth. Maintain BUY with revised SoTP-based TP of Rs 1,726 (Rs 1,886 earlier) based on 16x FY15E and value of investments at Rs 428/share. At CMP of Rs 1,469 (implies 17% upside), the stock trades at PE of 15x FY14E core EPS of Rs 68 (excluding dividend income from subsidiaries) and 13x FY15E core EPS of Rs 81 (adj. for VoI of Rs 428). Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Ltd. Tel: +91 22 43251144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Ltd. Tel: +91 22 43251123

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