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Larsen & Toubro Ltd. (LT) - Company Update - Dated - December 06, 2013




Axis Capital Limited


09 Dec 2013





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Key takeaways from our interaction with the management: L&T is confident of achieving 15-20% inflow growth in FY14 based on 27% growth in H1 and strong prospects in Transportation, Power and Oil & Gas. Private capex could take 12-18 months to revive. Incremental order inflow in FY15 to be driven by Defense, Oil & Gas and Roads, while Buildings & Factories (30% of inflow) is expected to be weak. Maintained 15% revenue growth guidance for FY14, which implies H2FY14 domestic growth of 22% (down 2% in H1) on the back of large orders won in H1CY13. We build in 10% revenue growth for FY14 due to impending elections. We expect 15% revenue growth in FY15 on FY14 backlog growth of 23%. Management maintained margin guidance of volatility of +/-50 bps in FY14 from 11.5% in FY13. Working capital: Management indicated the new normal for working capital/sales is 17-20% and would maintain it in this range by either increasing payable days or reducing receivable days. Investment in Infra subsidiaries: Contrary to previous guidance of not bidding for any new development project, management indicated that IDPL will continue to bid for new assets. Management maintained its stance of not lending parents' balance sheet to fund future equity investments for development projects. But if IDPL is not able to monetize the existing assets or raise fresh equity, parent will have to invest in the future assets. Near term upside capped: Maintain HOLD. We maintain FY15 estimates and introduce FY16. We raise target multiple to 18x from 16x for standalone business on expected de-bottlenecking of infra capex post elections. Our revised SoTP-based TP of Rs 1,142 (Rs 955 earlier) is based on 18x FY15E core EPS of Rs 48 (ex. dividend income) and VoI at Rs 275/sh. We believe deteriorating working capital and cash flows will remain an overhang on the stock and cap near term upside. However, medium to long term catalysts exist: (1) asset sales, (2) higher domestic growth, and (3) reduction in working capital. At CMP of Rs 1097 (implies 4% upside), the stock trades at P/E of 21x/17x FY14E/ FY15E core EPS (ex. dividend income) of Rs 40/ Rs 48 (adj. for VoI). 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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