Larsen & Toubro Q1FY13: Net Sales grew 26.1% YoY to Rs11,955.4 cr
In Q1FY13, Net Sales of L&T (parent) grew 26.1% YoY to Rs11,955.4 cr on strong execution. EBITDA margins deteriorated on MTM loss of Rs267 cr posting margins of 13.5% compared to 14.5% in corresponding quarter last year. Profits were bolstered up by higher other income (which increased from Rs269.7 cr to Rs605.8 cr on higher treasury income & higher dividend income). PAT was up 15.7% YoY to Rs863.7cr. Company reported an exceptional item pertaining to VRS expenses of Rs38.3 cr. Order inflows have gone up 21% YoY to 196 bn. Order backlog at 1,531 bn is 2.8x company’s trailing twelve months sales.
Stock Valuation and Outlook
Increasing competition, award deferrals and subdued macro environment are putting pressure on the performance of the company. Heightened competitive pressures in a sluggish environment pose a risk to L&T’s order inflow/revenue ratio. While the management faltered in giving out late revised order growth guidance in FY12, it has maintained an optimistic guidance of 15-20% growth in order inflows and sales for FY13. Although L&T maintains that it would not resort to undercutting to win orders, pricing cuts could become inevitable in a tight demand-supply scenario with intensified competition.
In Q1FY13, Net Sales of L&T (parent) grew 26.1% YoY to Rs11,955.4 cr on strong execution. EBITDA margins deteriorated on MTM loss of Rs267 cr posting margins of 13.5% compared to 14.5% in corresponding quarter last year. Profits were helped by higher other income (which increased from Rs269.7 cr to Rs605.8 cr on higher treasury income & higher dividend income). PAT was up 15.7% YoY to Rs863.7cr. Company reported an exceptional item pertaining to VRS expenses of Rs38.3 cr. Order inflows have gone up 21% YoY to 196 bn. Order backlog at 1,531 bn is 2.8x company’s trailing twelve months sales.
For FY13, management expects 15-20% order inflow and sales growth which looks challenging to achieve in the current weak environment. L&T is banking on Rs120-150 bn worth of deferred orders (in some of them L&T is L1 bidder). These orders are likely to be concluded in H1FY13. It is also expecting to improve its share of international orders with higher emphasis on international market: The management suggested that the eventual target for international business is 25% of inflow and order book versus 13% of inflow and 9% of order book currently. New geographies under focus will be Kuwait, Qatar, Indonesia, Brazil, Iraq, GCC and CIS.
The current slowdown in infrastructure capex is because of a combination of policy paralysis by the government as well as rising interest rates that are making projects more expensive. Even existing projects are moving slowly because of challenges such as land acquisition, environmental clearances, fuel supply availability, etc. However, HDFc Securities believes that eventually we would see these issues settle down as a result of action from Government and/or settling down of global issues. L&T is best positioned to benefit from this over the medium term. L&T remains the best proxy on the macro revival story in the capital goods space.
L&T management is on the lookout for long-term strategic investors in the infrastructure development subsidiaries (L&T IDPL, Power Development Company, L&T Realty). These entities are working towards exploring various method of raising funds for equity investments in the projects under construction/ development. L&T plans to take a back seat in incremental BOT projects – does not plan to bid for any more road BOT projects.
HDFC Securities maintains their FY13 estimates as company has posted a decent Q1FY13 performance despite a challenging environment while MTM losses, VRS expenses are one offs which may or may not recur in the coming quarters. Pressure on margins would remain with the change in order mix towards infrastructure projects, which are generally lower margin compared to other segments.
They had stated in their result review dated May 23, 2012 that stock could trade in Rs1043 to Rs1323 band (13x-16.5x FY13 EPS) for the next quarter. Post the issue of the report, the stock touched a low of Rs1106.05 on 4th June 2012 and high of Rs1442 on 11th July 2012.
L&T has outperformed the market by about 15% since April-end and hence partly discounts the better than expected performance in Q1FY13.
HDFC Securities feels investors could look to exit the stock at rises of Rs1444-1484 (18-18.5x FY13 EPS) and buyback the stock on dips to Rs1162 – Rs1203 (14.5x-15.0x) in the next 1 quarter.
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