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Jan 30, 2013, 02.29 PM IST | Source: Moneycontrol.com

Hold Larsen & Toubro: Ventura Securities

Ventura Securities has recommended hold rating on Larsen & Toubro (L&T) in its January 28, 2013 research report. According to the research firm, L&T is best placed to benefit from a gradual recovery in the capex cycle, given its strong business franchise, solid execution track record and a diversified business model.

Ventura Securities has recommended hold rating on Larsen & Toubro (L&T) in its January 28, 2013 research report. According to the research firm, L&T is best placed to benefit from a gradual recovery in the capex cycle, given its strong business franchise, solid execution track record and a diversified business model.

"L&T revenues were higher by 10.3% YoY to Rs 15429.4 crore on a YoY basis led by a healthy order book accretion and on-time project execution. Machinery & Industrial products segments reported 264 bps and 814 bps improvement in their EBIT margins to 11.1% and 27.1%, respectively.

Operating profits grew by 7.8% YoY to Rs 1,474.9 crore on Q3FY13. However, EBITDA margins declined marginally by 20 bps YoY and stood at 9.6%. Further, boosted by strong order flow profits for the quarter were higher by 13% YoY and stood at Rs 1121.8 crore as compared to Rs 991.6 crore in Q3FY12.

In Q3FY13, L&T’s order inflow was Rs 19500 crore, a growth of 14%. Infrastructure and power segments accounted for 88% of the order inflow during the quarter. Order book were reported at Rs1,62,300 crore implying a book-to-bill of 2.7x. Slow moving orders are 11% of the order book. Including road project orders from GVK and GMR.

The management has maintained its guidance of 15-20% YoY growth in order inflow in FY13E, (indicating Q4FY13E order inflow of Rs200-250bn) and EBIDTA margin of +/-50-70bps. The company is expecting strong orders from Hydrocarbon segment mainly from Middle East countries.

Engineering and Construction (E&C) segment accounted for 88.4% of the total revenues of the company in Q3FY13. Revenues of the E&C segment grow by 11% YoY in Q3FY13 to Rs13880 crore mainly on account of strong execution of existing order backlog. However, EBIT margin of this segment declined by 108bps YoY (-300bps QoQ) to 9.2% mainly due to higher input costs. While E&E segment posted yet another quarter of muted revenue growth. Despite subdued demand in industrial and agriculture sectors, revenues grew by 5% yoy to Rs 890 bn supported by price hikes and higher export growth. EBIT margins enhanced by 260 bps yoy to 11.1% (positive surprise) led by price rise and favourable revenue mix. Hence EBIT growth at 38% yoy to Rs 98.7 crore.

The management has reiterated its guidance of a 15-20% growth for both revenues and order inflows (for FY13). Also, the company remains cautiously optimistic of improvements in the domestic macro-economic environment and expects demand to emerge from sectors such as fertilisers, oil & gas, transportation, power T&D as well as core infrastructure. Further, we believe, that a fall in interest rates and positive policy action will provide a further fillip to the order inflows. L&T is best placed to benefit from a gradual recovery in the capex cycle, given its strong business franchise, solid execution track record and a diversified business model. At a CMP of Rs 1594, the stock is trading at 17.0x and 14.5x FY14E and FY15E earnings and we recommend a HOLD on the stock," says Ventura Securities research report.

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