Expect L&T's topline to grow by 14% in FY14: Kotak Sec

Despite slowdown in the economy, L&T with its diversified presence across countries has grown its order inflow by 21 percent Year-on-Year. However, many analyst notes are doing the rounds where they have met the management and have sensed skepticism on domestic capex cycle, as the company continues to shift its focus on ramping up share of international business.

Sanjeev Zarbade, Analyst, Kotak Securities told CNBC-TV18 that going ahead L&T is likely to maintain margins at current levels. Reason being, the new orders are not really margin dilutive and no significant downside risk to the margins is seen.

For the next year Zarbade expects around 14 percent growth in the top-line for the company.

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What have you made of Larsen and Toubro (L&T) routing that insurance buy through themselves?

A: It is a decision, which the company has taken so far as its overall growth of the finance business is concerned. So, while the stake has been bought by L&T, but eventually it remains to be seen how they plan to take it forward.

They have their own plans in terms of growing the finance business as well as the IT business. So, it is in that context that the company has purchased the stake.

Q: What is your view on how this quarter may pan out and how worried would you be with regards to the orders that L&T has shown up?

A: We are also observing this trend. For the quarter they have announced around Rs 6,000 crore of orders and that is quite low compared to previous trends. The other thing was that typically the second half of a fiscal is quite strong in terms of order intake. That has been the trend over past several years.

On the other hand we have seen that in the current fiscal at least the order announcements have not really kept the momentum. This we saw in the first half that is a matter of concern for L&T. We saw that in the third quarter as well, where there were concerns in terms of order announcements falling short, but the actual order intake was in line.

So, in all probability there are quite a few orders where the company does not disclose on account of client confidentiality.

Q: What kind of numbers you are pencilling in then in terms of core volume growth that L&T will do for themselves and whether or not they can hold onto margins?

A: We are maintaining a stable outlook on the margins. Though earlier there were concerns that the order mix is changing in favour of infrastructure, but the company has time. The new orders that they are getting are not really margin dilutive.

So, to that extent we are not seeing any significant downside risk to the margins. The volume growth would be a subject of the execution grid that the company would continue, which in turn is also a reflection of the order intake growth. For the next year we are expecting around 14 percent growth in the top-line for the company.

Q: What is your price target on L&T right now?

A: We have a price target of Rs 1,740 and have accumulated rating. Basically, we find that the valuations at the current price are reasonable. However, it needs to be noted that the capital goods sector is not out of the woods.

The data that we are getting in terms of the Index of Industrial Production (IIP) capital goods index came at negative 1.8 percent. The outlook provided by the global Multinational Corporations (MNC) like Cummins, Caterpillar and Siemens are also pointing to a very muted to a negative kind of a growth outlook in 2013.

Overall it is a sector which is currently showing weak trends, but the valuation for L&T is now reasonable. In that context we are recommending accumulate at the current price.