Accumulate L&T; target of Rs 1850: Networth

Broking house, Networth Stock Broking has recommended accumulate rating on Larsen and Toubro with a one-year target of Rs 1850.

Networth Stock Broking report on Larsen and Toubro:

Highlights for the quarter Revenues remain lower than our expectation

Larsen and Toubro (L&T) revenue for the Q3FY07 remained far below our expectation. During the quarter net sales showed a rise of 11.58% to Rs.41184.2 million over the corresponding quarter of the previous year. During the quarter EBIDTA showed a rise of 72.33% to Rs.4255.30 million and net profit rage by 45.85% to Rs.3439 million over the corresponding quarter of the previous year. Engineering & construction segment (E&C), Electrical & Electronic segment (E&E), Machinery & Industrial product segment (MIP) and Others reported a rise of 6%, 30%, 17% and 46% respectively over the corresponding period of the previous year. L&T revenues for the 9MFY07 showed a rise of 12% to Rs.113310 million over the corresponding period of the previous year. During 9MFY07 EBIDTA showed a rise of 90.6% to Rs.9077.60 million and net profit 45.20% to Rs.7022.50 million over the corresponding period of the previous year. Management continues to maintain the 20% revenue growth for the full year.

Margin continue to improve

During the 9MFY07, overall EBITDA margins have improved by 300 bps on the back of improvement in margins in all the segments. Engineering & construction segment margins have improved by 340 bps points, E&E by 100 bps and MIP by 240 bps. Improvement in the margins was seen on the account of better selection of jobs, improvement in contract execution, drop in input costs and manufacturing efficiencies.

Better performance by the Subsidiary companies

In 9MFY07 consolidated revenues of L&T posted a rise of 20% to Rs.141.21 million over the corresponding period of the previous year. Consolidated profit adjusted for minority interest up by 89% to Rs.10.99 bn. Adjusted net profit reported an increase of 82% to Rs.15.29bn over the same quarter of the previous year. The higher growth in the revenues and profitability was seen on the back of imporved performance by L&T Infotech Ltd and L&T Finance Ltd. 

Huge order backlog shows visibility to the revenues

During 9MFY07 order inflow registered an increase of 41% to Rs.229 billion. Order inflows in E&C segment posted a rise of 43% to Rs.191.27 bn as compared to corresponding period of the last year. Order backlog at the end of Q3FY07 stoods at 357 bn, which is 51% higher than the corresponding period of the previous year. As on Dec’06, the total backlog of the company stands at Rs.357bn which is almost 2.2 times of the 12 months trailing revenues.

Valuation

Despite of lower revenues growth in the 9MFY07 company maintains the revenue growth of 20% for the full year translating into to huge jump in the revenues in the last quarter and improvement in the margins is expected to lead to better profitability. We expect company’s consolidated revenues to grow by CAGR of 25.15% in next two years. The consolidated net profit is expected to grow by 22.79% in FY07E and 31.23% in FY08E. The stock is trading at 23.20x FY08E consolidated earnings. We recommend “ACCUMULATE” with one year target price of Rs 1850.