Ventura Securities has recommended a hold rating on Larsen and Turbo (L&T), in its October 25, 2013 research report. According to the research firm, L&T is a preferred pick in the capital goods space.
Ventura's report on Larsen and Turbo (L&T)
In Q2FY14, Larsen Toubro Ltd (L&T) reported a healthy operating performance, with strong execution propelled by export sales growth and a decent in line margins, notwithstanding the losses on shipbuilding and forex. L&T reported a sales growth of 10 percent YoY to Rs 14,509 crore driven by export sales (+32 percent YoY), while domestic execution registered marginal growth (up 4.2 percent YoY). However, the EBITDA margin contracted by 90bps YoY to 9.7 percent, impacted by a 21 percent YoY increase in staff costs and higher forex losses (Rs 200 crore in Q2FY14). Regardless of that, recurring net profit grew 6.8 percent YoY, helped by higher other income, since dividend from subsidiaries in Q2FY14 was higher than in Q2FY13.
On the segmental front, Infrastructure witnessed a robust revenue growth of 36 percent YoY and a 200bps EBIT margin expansion in Q2FY14. Segment margins were helped by a settlement claim of Rs 100 crore received during the quarter. While the Hydrocarbon and Power segments’ revenue witnessed a decline of 9 percent and 40 percent YoY, respectively, the MMH segment’s revenues skid 19 percent YoY led by the lower order intake and nearing of completion of existing backlog and, hence, negative operating leverage.
Of the total revenues booked in H1FY14, 46 percent came from the execution of infrastructure sector orders, 9 percent from power sector orders, 18 percent from hydrocarbon and 8 percent from the process segment while others contributed the remaining 19 percent of total revenues. Over the same period, the E&E segment revenues grew 8 percent regardless of sluggish demand trends while machinery & industrial products (MIP) revenues declined 8 percent YoY for Q2FY14 owing to the weak industrial demand and business restructuring.
The company has been witnessing losses in the shipbuilding business since Q4FY13. For the first time, it quantified the loss in Q2FY14 at ~Rs 200 crore in which revenue from the business was practically non-existent.
L&T reported a strong order inflow of Rs 26,533 crore, up 27 percent YoY, driven by overseas project gains, which contributed 43 percent of total wins in Q2FY14. Domestic order inflows declined YoY during the quarter. Strong inflows and relatively slower revenue growth led to the order book expanding 11 percent YoY to Rs 1,76,036 crore. The company maintained its full-year order inflow growth guidance of 20 percent on the back of a large project pipeline in hydrocarbons, power T&D, infrastructure (building and transportation) and metro orders in the Middle East and a likely EPC order for 1,320MW thermal power plant in Madhya Pradesh.
"Currently, at the CMP of Rs 947, L&T is trading at 17.4x and 15.7x its estimated earnings for FY14E and FY15E, respectively, and we recommend a HOLD on the stock. Given that it has maintained steady growth despite a weak environment, L&T is a preferred pick in the capital goods space," says Ventura Securities research report.
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