Broking house, DSP Merrill Lynch is bullish on Larsen and Toubro, L&T and has recommended buy rating on the stock with a target of Rs 1550.

DSP Merrill Lynch report on Larsen and Toubro:

Raising Earnings & PO to Rs1550 (+21%) – Order Backlog +52%YoY; Recurring PAT +53% YoY; Subsidiary PAT Multiplies

"Post-2QFY07 results, we hike our earnings estimates by 10% for FY07 and 9.2% for FY08 & PO to Rs 1550 (1275) led by strong subsidiary performance. In 2QFY07, L&T reported 52% growth in overall order backlog; 141bps EBITDA margin expansion to 8.9% and recurring PAT was +53% YoY to Rs 1.83 billion (MLe Rs 1.75 billion). Importantly, L&T subsidiaries did exceptionally well with 2.8x growth in PAT. We reiterate our Buy recommendation."

2QFY07: Order Backlog +52%YoY; Recurring PAT +53% YoY

"L&T’s 2QFY07 (parent a/c) met four of our key expectations for a Buy namely, a) Robust order intake - up 20% YoY leading to order backlog of Rs 306.7 billion up 52% YoY (~2x trailing 12month sales); b) sales growth - up 12% YoY; c) EBITDA margin expansion by 141bps & d) Rec. PAT at Rs 1.83 billion (up 53% YoY, ex-onetime)."

Subsidiaries & Associates (S&AC) – PAT Multiply by 2.8x

"L&T’s S&AC did exceptionally well with subsidiaries growing PAT at 2.8x led by L&T Infotech - sales +80%YoY and PAT +237%YoY. Also its associates had PAT growth of 53%YoY led by cos. such as L&T Komatsu / Case / EWAC Alloys. Consequently, L&T consolidated PAT (ex-one time) grew 89%YoY in 1HFY07."

Drivers of 31% earnings CAGR over FY06-08E & Buy rating:

"Acceleration in domestic / Middle East capex cycle driving its sales at 22% CAGR over FY06-08E. Likely improvement in margins on completion of low margin orders & achieving margin accounting threshold. Our upgraded PO (Rs 1550) based on a multi-pillar approach is driven by higher S&AC valuations & rollover of target earnings. Risks: Raw materials, competition & project execution."