L&T likely to see better margins in FY14: Antique Broking

In an interview to CNBC-TV18, Dhirendra Tiwari, non executive Director,Head of Research Antique Institutional Equities discusses Larsen &Tourbo's Q2 result. He talks about the outlook, the concerns involved and the plans for FY14. 

L&T's September profit grew 42.5 percent year-on-year to Rs 1,137 crore, an exceptional gain of Rs 214 crore on divestment in its arm. Below is an edited transcript of Dhirendra Tiwari's interview on CNBC-TV18. Q: What was your key takeaway from the Larsen & Toubro (L&T) management yesterday?
A: L&T has done pretty well. There were three major concerns for L&T. One was the order flows due to the slowdown in economy. The second was the revenue growth because of the risk in execution and thirdly the margins as there were concerns regarding the quality of the order book. L&T has done pretty well on all these three accounts. It has demonstrated a very strong order inflow growth in the first half which is up 26 percent. If you look at the guidance of 15 percent it is essentially Rs 82,000 crore of order inflows for the year and they are well on track. If economy were to turnaround, they can do better.
For the second issue, execution also has been very strong. It has done little over 20 percent in sales for the first half of the year and again they will meet their guidance of 15-20 percent. The margins have also been pretty healthy.
It is a very strong set of numbers and if they can demonstrate this kind of growth when the economy growth is slow, then with positive turn around, they will do much better. So I am very positive and pleased with the performance of the company. Q: What kind of EPS estimates do you have for FY14 for L&T?
A: For FY14 we have raised estimates by 4 percent. So consolidated EPS is little less than Rs 100 per share. Q: How do you map valuations for this company after the recent run up in the stock? Are you still comfortable buying it?
A: I am comfortable because if you see the valuations of L&T, it has been led by order inflow growth. It has been led by the interest rate environment in the economy and the overall investment in the capex cycle. We are probably at the bottom and can pick up only in the next one or two years.
We value L&T on 18 times standalone earnings and that results to Rs 1,500 per share and giving close to Rs 405-406 for the subsidiaries. Subsidiaries have also done well. If you look at L&T Infotech, it has posted 35 percent growth profit for the first half. Same is true for L&T Finance holdings. So, even the subsidiaries are chipping in.
When the capex cycle is likely to pick up, interest rates may go down; there is a significant case for rerating L&T. So, 18 times is still lower than the peaks in 2008-2009. It is a reasonable assumption for the valuations. At 18 times stand alone earnings at about Rs 405 per subsidiaries, we come to target price of Rs 1,906 which is a reasonable expectation from the stock. So the stock has about 15-16 percent upside from the current levels going forward.