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Larsen & Toubro Ltd - Q3FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


24 Jan 2014





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Larsen & Toubro Ltd - Q3FY14 Result Update CMP: Rs 1,034 Target Price: Rs 1,135 Recommendation: ACCUMULATE “Strong operational performance in difficult times…” L&T demerged its Hydro carbon business into a wholly owned subsidiary. Current quarter results published are standalone and do not include hydrocarbon segment. Consequently L&T net sales grew by 12% YoY to Rs. 14,387.5 cr, largely in line with expectation. EBIDTA margins improved by 186 bps to 11.6%, above expectation. Interest cost increased by 24.4% on account stretched working capital. The company registered exceptional item of Rs. 104.4 cr on sale of investment. On Adjusted basis, PAT increased by 12% YoY to Rs 1136.3 cr. Order inflows during the quarter increased by 21% YoY to Rs 21,700 cr. Order book stands at Rs. 171,200 cr. Demerger of Hydro carbon segment into a wholly owned subsidiary L&T demerged its Hydro carbon business into a wholly owned subsidiary. The company from here on would published standalone quarterly numbers (excluding hydrocarbon segment). All disclosures including order book and order inflows would also be for standalone business excluding Hydro carbon segment. During FY13 L&T registered hydrocarbon net sales of Rs. 9,308.9 cr; EBIDTA of Rs. 1,000.4 cr and PAT of Rs. 526.1 cr. Demerger was a strategic move to increase focus on the hydrocarbons segment. International business is a significant part of hydrocarbon segment and has higher overseas deputation. We believe this is right strategic move by L&T. However, quarterly disclosure of performance would improve transparency. Infrastructure segment drives growth in sales The company net sales grew 12% YoY in Q3FY14. Strong growth in Urban Infra, Transportation Infra, Water and Power T&D and Heavy Engineering on the back of robust opening order book supported growth in sales. Domestic v/s international sales mix stood 83:17. For 9M FY14, net sales have increased by 9% to Rs. 36,520 cr. The company sees limited risk to 15% sales growth guidance for FY14. We have factored in a sales growth of 13% for FY14. Relatively stable margin guidance maintained for FY14 The company registered healthy EBIDTA margins of 11.6% up 186 bps YOY. Raw material cost as a percentage of sales declined by 195 bps to 70.9% and contributed to margin improvement. However, management maintained its full year flat OPM% guidance with a 50 bps variation and commented quarterly margins may vary as per job mix and stage of projects. NWC stretched to 21% of sales Net Working capital stretched to approx 21.3%; which is concerning. Support to supply chain and lower advances from customer have stretched the working capital. We expect net working capital to remain stretched at these levels. Healthy order inflows continue in Q3FY14 In Q3FY14 order inflows increased by 21% YoY to Rs 21,700 crore (excluding Hydro carbon). For 9MFY14 order inflow have increased by 23% YOY to Rs. 67,400 cr (excluding Hydrocarbon). For 9M order inflow international orders constituted 30% while domestic orders constituted 70%. Consequently, order book stands at Rs.171,200 cr (excluding hydrocarbon segment). Approx 10% are slow moving orders excluding GMR & GVK road project orders. The company mentioned if few projects are deferred to FY15; order inflows growth for full FY14 could be 15%. Sector wise it expects Building & Factories, Power, Transportation infra to contribute to growth in orders. A shift in focus to international territories continues. We hav...

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