L&T margins to improve in H2FY15; positive on co: Kotak

Below is the verbatim transcript of Sanjeev Zarbade's interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy

Sonia: Given that Larsen and Toubro (L&T) has run-up so much what would you do at this juncture and based on the numbers what are your forecast for say the second half of the year and for the end of FY15?

A: If you look at the performance of L&T in the first quarter the company had come out with numbers which were a bit disappointing because the hydrocarbon profits were taken as a negative surprise and after that the stock came down from around Rs 1650 levels to around Rs 1450 levels. From there it has come back to Rs 1650 levels. So in a way it has underperformed the broader market in the last quarter.

Now in the current quarter we have seen that although the profits were higher than our expectations on the standalone and consolidated basis but the revenue growth was quite weak. That indicates that there were execution challenges for the company.

Also segment wise several of its divisions reported contraction in the profitability. So it was a mixed numbers from the company, order intake was strong in a very difficult environment. So we are recommending investors to buy the stock on any declines from here on, we continue to be positive on the company given the fact that the economy is on the cusp of a revival in economic growth, in capex cycle and L&T continues to be the best play. So it is all about entering the stock at the right price and any declines from these levels should be looked at as a good entry point to buy the stock.

Latha: So you would have enough confidence that second half at least will be better than the first half. Where is the cusp, does the downturn continue for a couple of quarters more or does it turn in the second half itself? Also what is your price target?

A: The management has been saying that a company like L&T needs to be looked at at a broader level in the sense that at least one year time frame one should look at not so much focused on the quarterly numbers. But so far as the outlook on orders and revival in the orders is concerned, the management has indicated that although large orders in the sense that in sectors like chemicals, refineries, metals are yet to see any traction but they are seeing some positive traction on the road side wherein couple of express ways could get announced and even on the dedicated freight corridor there is positive traction happening. Especially on the western corridor side where there are only three-four bidders, L&T stands a very good chance.

Also there is some positive traction on power utility orders wherein around 10000-12000 megawatt of project pipeline could be seen in the second half. So L&T could win a couple of them.

In our view it is very difficult to say that the second half could be better than the first half but traditionally the second half even in terms of order intake is better than the first half. Progressively things are happening on a better track so we do remain optimistic so far as the order intake and coming quarters to be better than the earlier ones.

Sonia: What is your projection as far as the margins are concerned? This time because of the low order backlog sectors like power, metals etc saw the margins decline. But in the second half what are you projecting as far as overall margins are concerned?

A: L&T margins in the first half is always weak because if you compare first half to first half then obviously the margins have come down. But second half is always better than the first half in terms of margins because lot of revenue gets booked in Q4. So we certainly believe that the second half margins should be much better than the first half margins but on a year-on-year basis second half to second half margins there could be either a flattish or slight decline in margins. But I don’t see any significant drop in the margins on a year-on-year basis in the second half.

Again the kind of business that L&T is in EPC, one cannot look at significantly high margins. They tend to remain in the 9.5-10.5 margins in the EPC business. On an overall basis because there are several businesses in the company including InfoTech and financial services then the margins tend to get higher. But these are the kind of margins that are sustainable 9.5-10.5 percent which is what the company is doing right now and there is bit of scope of improvement in the margins as the overall competitive scenario improves going ahead.

Latha: Do you track Siemens? They have sold their Postal and Parcel Logistic Technologies which is a subsidiary of their parent and it has been sold for Rs 1023 crore. It is a related party transaction and therefore a majority of the minority shareholders will also have to approve that is there in the press release. What are your comments on this sale?

A: I need to see the numbers in detail but if you see the historical trend for Siemens over the last six-seven years, they have done such kind of transactions wherein a group company was bought into the standalone company and then again transferred back to the parent or hived off separately. And typically the valuations are not related to what the market valuations are. So it is entirely between the various group entities of the company. We have seen this happening earlier with Siemens Information Systems Limited which was taken into parent and then transferred back. So not much we can comment so far as the valuations are concerned. Also we don’t know at what price they had taken this company.