L&T - Q3FY14 Update, CMP Rs.1033, Rating Change to HOLD, Revised Target of Rs.1134 - Sushil Finance

Q3FY14 RESULT UPDATE
LARSEN & TOUBRO LTD. - CMP Rs.1033, Rating Change to HOLD, Revised Target of Rs.1134

Revenue growth led by Infrastructure & heavy engineering segments

During Q3FY14, L&T's Revenue grew 11.8% YoY to Rs. 143.88 bn, led by strong growth in its Infrastructure & heavy engineering segments, which grew by 24% & 29%, respectively. The overseas Revenue also grew 11% YoY to Rs. 23.7 bn. The Net Revenues of Infrastructure biz grew 24% YoY to Rs. 87.8 bn, driven by healthy order book & strong execution in building & factories, transportation infra, power T&D and water biz, while heavy engineering biz grew 29% YoY to Rs. 10.3 bn, and E&A biz grew 13% YoY to Rs. 8.7 bn. However, its Power and MIP biz declined 30% & 24%, respectively on YoY basis, and the Metallurgical Material handling (MMH) biz grew just 1% YoY. Its Hydrocarbon biz transferred to a separate subsidiary and its performance was not reported during the quarter. Despite slower Revenue growth of 9% during 9MFY14, the management has maintained its FY14E Revenue growth guidance at 15%, which in our view looks difficult given the slower execution of projects in power and MMH segments. We expect L&T to achieve ~12% Revenue growth in FY14.

EBITDA margins expand 186 bps due to lower forex MTM loss & strong Infra biz growth

During Q3FY14, its EBITDA grew 33% YoY to Rs.16.7 bn, while its EBITDA margins expanded 186 bps YoY to 11.6%, mainly due to Rs.650 mn reduction in forex MTM loss (Rs.350 mn v/s 1000 mn in Q3FY13), and margin expansion in Infrastructure biz. However, due to 20% YoY fall in other income despite higher dividend from subsidiaries & associates, its adjusted Net Profits (APAT) grew 12.1% YoY to Rs.11.36 bn. The company expects to maintain its FY13 EBITDA margins during FY14. In view of 90 bps margin improvement in infra biz in 9MFY14, we expect its overall EBITDA margin to expand 70 bps to 11.2% during FY14.

Strong order inflow driven by Infrastructure biz orders

During Q3FY14, the company witnessed strong order inflows in infrastructure (Rs.183.9 bn), while the ordering environment in Power EPC, Mining, material & industrial remained weak. During the quarter, L&T's outstanding order book grew by 13% YoY to Rs. 1,712 bn, while its order inflows grew 21% YoY to Rs.217 bn.

Its order inflows for 9MFY14 grew 23% YoY to Rs.674 bn. Despite Rs.58 bn worth of orders announced during Jan'14, the L&T has revised its FY14 order inflow growth guidance from 20% earlier to 15-20% now as it expects slower order inflows in Q4FY14. We expect L&T to achieve 15% order inflow growth for FY14. The current order book provides Revenues growth visibility for 2.5+ years.

OUTLOOK & VALUATION

Due to change in business mix and macro environment, its net working capital (NWC) has increased substantially in last 2 years and currently at 21.3% of sales. As per the company the reduction in customer advances and increase in credit period for its vendors are the reasons behind sharp increase in NWC. In our view, the higher NWC continues to be a concern going forward & company should bring it down gradually.

In view of its 9MFY14 performance and demerger of the hydrocarbon business, we have revised our standalone FY14E & FY15E Revenues & APAT estimates. We have valued its hydrocarbon business separately to arrive to our target price. We now expect L&T to deliver Revenue & APAT CAGR of 13.6% & 10.6% respectively over FY13-15E. At CMP of Rs.1033 the stock trades at 20.8x & 18.6x its FY14E & FY15E standalone Earnings of Rs.49.6 & Rs.55.2, respectively. We change our rating to 'HOLD' on the stock with SOTP based target price of Rs.1,134.

Source : Equity Bulls

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