Brokerage house Motilal Oswal is bullish Larsen and Toubro (L&T) and has recommended buy rating on the stock with a price target of Rs 1,730, in its research report dated May 23, 2013.
Motilal Oswal's research report on Larsen and Toubro (L&T)
"Larsen and Toubro's (LT) operating performance for 4QFY13 was meaningfully below our expectations. Full-year numbers were short of the management's guidance (revenue up 14.5 percent v/s guidance of 15-20 percent; E&C EBITDA margin down 226bp v/s guidance of +/-50bp). Net order intake in FY13 was flat at INR710b v/s guidance of 20 percent growth. Key positives are continued strong growth in gross order inflows (up 32 percent YoY to INR279b, and positive cash flow from operations (INR29b) in 4QFY13.'
"Guidance for FY14 - a positive surprise: The management's guidance for FY14 came as a positive surprise (order intake to grow 20 percent, revenue to grow 15 percent, and E&C EBITDA margin to be maintained). Also, the management expects margins in overseas business to be 250-300bp lower than in domestic business, but RoE/RoIC is better due to higher asset turns."
'Hiving off Hydrocarbons business: LT will be hiving off the Hydrocarbon E&C business into a separate subsidiary and targets to double revenue over three years, which is impressive and is the next logical step post formation of various operating companies."
"Investment in subsidiaries curtailed: Capital allocation to subsidiaries in FY13 was just INR12b (net of divestments) v/s INR20b in FY12. Investments /advances to subsidiaries stood at INR141b as at March 2013, accounting for 38 percent to the capital employed and have impacted consolidated RoE (16.8 percent in FY13 v/s peak of 34 percent in FY07).'
"Maintain Buy, with an SOTP-based target price of INR 1,730 (22 percent upside). We value LT standalone at 15x FY15E earnings and subsidiaries at INR407/share," says Motilal Oswal research report.
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