Hold Larsen and Toubro: GEPL Capital

“L&T demonstrated a robust top line performance as it posted a strong YoY net income growth of 20% at Rs 94.8bn for Q1FY12 against Rs 78.81bn YoY. Although this growth didn’t percolate to EBITDA & EBITDA Margins which came in at Rs 11.3bn against Rs 10.0bn YoY & 11.9% against 12.7% YoY, respectively. This was primarily due to higher raw material cost (up by 53% YoY for Q1Fy12) owing to higher commodity prices & higher employee expenses (up by 36% YoY for Q1FY12) due to new recruitments and existing staff appraisals. High earnings growth percolated to PAT as it was up by 13% YoY at Rs 7.5bn for Q1FY12 despite decline of 50 bps in PAT margin YoY. Higher depreciation (up by 47% YoY) & higher financial charges (up by 13% YoY) also led to PAT margin decline for Q1FY12, YoY. Depreciation increased due to capitalization of huge cap-ex that L&T incurred in previous year & is expected to remain on the higher side going ahead. Increase in financial charges was owing to high interest rate scenario, though the decline was reigned in due to higher other income (up by 31%) due to better returns on treasury deposits.”

“The management gave their guidance for order book growth for FY12E at 15%, though they were expecting slow off-take Q1FY12E, the order inflow surprised positively and was on the upper side of market expectations. Management is further hopeful of pick up from 2nd half onwards; inline with the guidance given by other players in the sector. They expect order inflow to increase from Oil & gas Sector and expect around Rs 100bn worth booking from the same for FY12E. On EBITDA margin front they have indicated that a decline may be on the charts of about 50-75 bps for FY12E and would trace back up in FY13E. The management also stated that execution pick up was witnessed in Power & Infrastructure sector and BTG orders have started contributing to the order book. They also said that Working Capital days would increase by 3-4 % leading Net working capital to rise up to 12% of sales from around 8% of sales by the end of this year. Looking at the tight Net Working Capital cycle at which the company operates, this may not affect much. They maintained that execution on the projects is moving on-time and would help them achieve their revenue growth target of 20-25% for FY12E.”

“The current market scenario in Infrastructure & Power sector has been marred policy delays & uncertainties. Though L&T still manage to grow; both on order booking & execution fronts. We like the company due to its ability to survive the competition and win orders in adverse market conditions, strong execution lead revenue growth, robust order book at 3X FY11 sales providing decent revenue visibility, stringent control over margins (above 12%) & net working capital (currently at10.3% of sales & expected to rise to 12%). Even in the current scenario stock has not given up much since low order inflow concerns have been allayed and margins also look under control after FY11 results (7% return in past 3 months). The stock is trading at 23X/20X its consensus (stand alone) EPS target of Rs 70/82 for FY12E/FY13E. We think that company is already enjoying premium valuations and potential upside from here would be limited. We recommend a hold rating,” says GEPL Capital research report.

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