Brokerage house Prabhudas Lilladher is bullish on Larsen and Toubro (L&T) and has recommended 'Accumulate' rating on the stock with a price target of Rs 1,053 in its research report dated November 20, 2013.
Prabhudas Lilladher's report on Larsen and Toubro (L&T)
"L&T reiterated its guidance of 15 percent sales growth, 20 percent order inflow growth and maintain margin at last year levels (10.5 percent) with +/-50bps variation for FY14. The required run-rate for H2FY14 is 21 percent sales growth (10 percent in H1FY14) and 15 percent (27 percent in H1) inflow growth to achieve the guidance. The management believes execution should pick-up in H2FY14 since lot of orders were received in H2FY13 (which were in the designing stage in H1FY14) and are likely to pick-up in execution. Also, the execution schedule was back-ended for the year. Since 90 percent of revenues in FY14 are likely to be booked from the opening order book, the visibility is better for the management. A pick-up in domestic execution should help improve mix and support margin profile in H2FY14."
"The management is targeting to improve RoE to 20 percent from the current level of 15 percent. Few things planned to achieve the same are 1) Not to invest in asset-heavy manufacturing businesses 2) Restrict investment in IDPL to current project pipeline 3)Restrict capex to only maintenance capex and 4) Contain and optimize working capital cycle. It is also targeting to grow by 15 percent CAGR in sales over the next four years and try and maintain margins."
"L&T highlighted that it has strong risk management systems in place. All tenders of ~Rs6bn are vetted by risk appraisal committee, between Rs6-15bn are vetted by committee chaired by CEO/CFO and projects above Rs15bn are vetted by Mr. Naik himself. In international projects, apart from normal risk management systems, additional factors of country risk are also given due consideration. It does not see any risk from large projects won from the Middle East as thorough analysis has been done on the same. Also, L&T has an experience of executing such projects in domestic markets and its presence in the Middle East markets for last several years has given enough experience to factor in all the visible risks in projects."
"L&T has invested ~Rs18bn in BTG facility, Rs16bn in nuclear forging facility and Rs18bn in shipbuilding yard. However, all three businesses are making losses due to macro issues and policy uncertainty. These subsidiaries saw combined losses increase to Rs3bn in FY13 from Rs196m in FY12. The company had built a shipyard in expectation of defence orders which have not yet fructified. The uncertainty surrounding outlook of nuclear energy in the aftermath of nuclear disaster in Japan and uncertain nuclear policy in India has led to nuclear forging JV not getting enough businesses, while power JV continues to suffer on account of lack of demand. As most of the new manufacturing businesses have recently been commissioned, we expect a loss in these businesses to increase and peak in FY14. We believe market outlook on all the three manufacturing businesses will continue to be encouraging in the long term. However, in the near term, it is likely to be uncertain."
Outlook and Valuation: "The stock is trading at a core PE of 12.7xFY15E earnings. L&T continues to be the best play in the India Capital goods space, given its strong execution capabilities, breadth of capabilities and relatively healthy/large balance sheet. We maintain ‘Accumulate’ rating on the stock with a target price of Rs 1,053," says Prabhudas Lilladher research report.
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