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Larsen & Toubro Ltd - Q2FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


31 Oct 2013





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Larsen & Toubro Ltd - Q2FY14 Result Update CMP: Rs 922 Target Price: Rs 1,021 Recommendation: ACCUMULATE “Good show in difficult times” L&T net sales grew by 10% YoY to Rs. 14,509.5 cr, in line with expectation. The company registered EBIDTA margins of 9.7%, largely in line with expectation. Other income increased to Rs. 449 cr on account of dividend from subsidiaries. Consequently PAT increased to Rs. 978 cr (up 8%YoY). Order inflows during the quarter increased by 27% YoY to Rs 26,533 cr. Order book stands at Rs. 176,000 cr. Sales growth guidance maintained at 15% for FY14 The company net sales grew 10% YoY in Q2FY14. Strong growth in Urban infra, Transportation Infra, Power T&D, Water and Heavy Engineering on the back of robust opening order book supported growth in sales. After decline in domestic sales in Q1FY14 (down 8%YoY); domestic execution picked up in Q2FY14 registering 4% YoY growth. International execution remained robust increasing 32% YoY. Domestic v/s international sales mix stood 25:75. The company has guided a mix of 21:79 for FY14 which can extend to 25:75 for FY14. The company maintained its sales growth of 15% YoY for FY14 as it expects robust execution in H2FY14. Relatively stable margin guidance (with variation of 50bps) for FY14 The company registered EBIDTA margins of 9.7%; a decline of 100 bps YoY as Employee cost increased by 103 bps to 10.9%. Staff cost increase was led by higher annual revisions, manpower augmentation and increased overseas deputation. The company also registered forex loss of Rs. 200 cr. Inventories write down in shipbuilding order also impacted margins. On positive front; raw material cost as a percentage of sales declined by 227 bps to 65.7% on account of job mix and benefit of lower commodity prices. Management maintains stable margin guidance with a variation of 50 bps. NWC remains stretched at 18% of sales Net Working capital remains stretched at approx 18% of sales mainly to support the supply chain and declining trend in advances from customer. The company expects net working capital requirement to remain in range of 15% to 20%. Healthy order inflows continue in Q2FY14; 20% order inflow growth guidance maintained for FY14 Order inflows increased by 27% YoY to Rs 26,533 crore during Q2FY14. International orders constituted 43% (up 133% YoY) while domestic orders constituted 57% (down 6% YoY). Major International projects wins like Riyadh metro order (Rs. 8250 cr) led to growth in overseas order flow. For H1Fy14 order inflow grew by 27% to Rs. 51,692 cr. Consequently, order book stands at Rs.176,000 cr. Approx 3% are slow moving orders excluding GMR & GVK road project orders. The company maintained 20% growth guidance in order inflows guidance for FY14. Sector wise it expects Building & Factories, water, Hydrocarbons, Power T&D & Heavy Engineering to contribute to growth in orders. A shift in focus to international territories continues. Our View & Valuation We expect H2FY14 to be strong quarters for L&T both in terms of execution and margins as compared to H1FY14.The company has also posted healthy order inflows in spite of current macro economic situation and has robust order backlog. We had a BUY on L&T. However, as stock has run up in last two months we now recommend an ACCUMULATE on the stock with price target of Rs 1,021 (based on SOTP based valuation and by assigning multiple of 14 times to its FY15E stand alone EPS).

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