Buy L&T: Edelweiss Research

Edelweiss Research report on L&T:

"Larsen & Toubro’s, L&T Q2FY07 results were slightly below our revenue estimate and inline with our profit estimate. 175% Y-o-Y EBIDTA margin expansion and 53% Q-o-Q growth in profit were the highlights of an otherwise soft Q2FY07 numbers."

"L&T’s subsidiary portfolio showed stellar performance with revenues and profits registering a growth of 46% and 135%, respectively, in H1FY07. Post Q2FY07, we continue to remain positive on the outlook of L&T and will calibrate our numbers post further clarity from the management on the outlook of its non-core businesses, investments, and subsidiaries."

Soft revenue growth in H1FY07; expect strong revenue run-rate in remaining quarters

"L&T’s standalone net revenue grew by 12% Y-o-Y and 8% Q-o-Q to Rs 37.4 billion in Q2FY07. The soft growth in revenue was on account of subdued performance by its E&C segment (8% Y-o-Y and 5% Q-o-Q growth), which contributed ~72% to revenues in H1FY07."

Margin uptick seen across segments

"On the EBIT margin front, Q2FY07 witnessed a huge improvement across segments. Where L&T’s E&C segment reported EBIT margin of 7.8% for Q2FY07, 2.3% Y-o-Y rise; its EBG and MIP reported margin uptick by 11.2% and 2.5% Y-o-Y to 15.8% and 14.4%, respectively."

Valuations remain attractive

"On a consolidated EPS estimate of Rs 47 and Rs 61 for FY07 and FY08, respectively, the stock trades at 27x FY07E and 21x FY08E earnings. Adjusting for cash and investments and subsidiary portfolio profits, the stock trades at an EV-to-order backlog ratio of 0.7x. Such valuation to a widening and deepening portfolio as represented by the order backlog embeds an attractive discount when compared to the engineering and construction basket. With macro outlook remaining positive and L&T being the default beneficiary across verticals, we continue to maintain our ‘BUY’ recommendation."