CMP: INR1,396 TP: INR1,721 Buy Larsen & Toubro BSE SENSEX S&P CNX 18,719 5,656 What can support FY14 margins? Analyzing possibilities Circumspect about nature of project wins; medium term margins at risk In FY13, L&T's E&C EBITDA margi n declined 110bp (v/s guidance of +/- 50bp) to 12%. The margin contraction, particularly in 4QFY13, led to sharp volatility in stock price, with L&T underperforming the Sensex by 6% over last one month. For FY14, management has guided for stable E&C EBITDA margins. We model E&C EBITDA margin decline of 75bp in each of FY14 and FY15, driven by the increasing competitive intensity, constrained environment and higher share of overseas projects. We crystal gaze the possibilities t hat can support margins in FY14. Both the factors that impacted margins in FY13 (increased contribution of overseas business and new project start-ups in domestic market not crossing the 25% margin recognition threshold) are likely to turn favorable in FY14. We continue to remain circumspect about the margin profile of overseas orders, given possibilities of poor fixed cost absorption and learning curve associated with new geographies and new segments. Also, large size orders would increase concentration risks . The skeptism is also driven by our own lack of understanding on several of these variables. L&T is exposed to several levers across business/geographic segments and has emerged as the E&C partner of choice in India. This gives it a solid foundation to capitalize on the next leg of the investment cycle. We remain positive on L&T's longer term prospects. Maintain Buy, with an SOTP-based price target of INR1,721. 1 20 June 2013 Update | Sector: Capital Goods Satyam Agarwal ([email protected]); +91 22 3982 5410 Deepak Narnolia([email protected]) /Nirav Vasa ([email protected]) Investors are advised to refer through disclosures made at the end of the Research Report. Shareholding pattern % As on Mar-13 Dec-12 Mar-12 Dom. Inst 36.3 36.8 36.6 Forei g n 21.0 21.0 19.7 Ot her s 42.7 42.3 43.7 Bloomberg LT IN Equi ty Shar es (m) 612.0 M.Cap. (INR b)/(USD b) 854.4 / 14.3 52-Week Range (INR) 1,720/ 1,308 1,6,12 Rel. Perf . (%) -6 /-9/-7 Financials & Valuation (INR b) Y/E March 2013 2014E 2015E Sal e s 614.7 689.8 805.0 EBI TDA 64.1 75.0 83.5 Adj PAT* 49.3 48.9 56.7 EPS (INR)* 80.6 79.8 92.6 EPS Gr. (%) 3.3 -0.9 16.0 BV/Sh ( INR) 476.2 527.3 590.2 RoE (%) 16.2 15.0 15.0 RoCE (%) 14.3 12.8 12.8 Payout (%) 28.0 28.9 28.9 Valuations P/E (x)* 18.3 17.5 15.1 P/BV (x) 3.1 2.6 2.4 EV/EBITDA (x) 14.4 12.2 11.4 Div Yield (%) 1.3 1.4 1.6 *Consolidated Stock performance (1 year) Contribution of overseas business in revenues expected to stabilize at 18.2% % Y oY FY12 FY13 FY14E Order intake (FY13 driven by domestic) Domestic -24.6 27.3 2. 0 Domestic intake gro wth i n FY13 was hig her t han Overseas 215.1 14.2 33.0 overseas; unl i ke FY12 when t he di f f erence was stark Revenues (entire increase in FY13 by overseas) Domestic 23.5 4.5 13.0 Healthy intake in FY13 likely to support FY14 Overseas 26.1 118.6 9.0 domestic revenues; while growth in overseas business to normalize Overseas Contribution (%) Order intake 17.9 16.3 21.0 Cont ribution of overseas business to revenues Revenues 9.9 18.6 18.2 increased sharply in FY13; should stabilize in FY14 Project execution cycle in domestic market supporting margins: Domestic revenue growth declined sharply from 24% in FY12 to just 4.5% in FY13. New projects that did not cross the 25% margin threshold accounted for a higher share of overall revenue. We believe a large part of these projects should cross the threshold in 2HFY14, leading to margin expansion. However, 1HFY14 margins could still remain constrained . Twin factors that impacted FY13 margins likely to turn favorable in FY14
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What can support FY14 margins? Analyzing possibilitiesCircumspect about nature of project wins; medium term margins at risk
In FY13, L&T's E&C EBITDA margin declined 110bp (v/s guidance of +/-50bp) to 12%.
The margin contraction, particularly in 4QFY13, led to sharp volatility in stock price,
with L&T underperforming the Sensex by 6% over last one month.
For FY14, management has guided for stable E&C EBITDA margins. We model E&C
EBITDA margin decline of 75bp in each of FY14 and FY15, driven by the increasing
competitive intensity, constrained environment and higher share of overseas
projects.
We crystal gaze the possibilities that can support margins in FY14. Both the factorsthat impacted margins in FY13 (increased contribution of overseas business and
new project start-ups in domestic market not crossing the 25% margin recognition
threshold) are likely to turn favorable in FY14.
We continue to remain circumspect about the margin profile of overseas orders,
given possibilities of poor fixed cost absorption and learning curve associated with
new geographies and new segments. Also, large size orders would increase
concentration risks. The skeptism is also driven by our own lack of understanding on
several of these variables.
L&T is exposed to several levers across business/geographic segments and has
emerged as the E&C partner of choice in India. This gives it a solid foundation to
capitalize on the next leg of the investment cycle. We remain positive on L&T's
longer term prospects.
Maintain Buy, with an SOTP-based price target of INR1,721.
Factors that impacted FY13 margins to support FY14 margins
FY13 E&C margins were impacted by (1) increase in share of overseas business
from 10% of revenue in FY12 to 19%, and (2) new project start-ups in the domestic
segment not crossing the 25% margin recognition threshold.
In FY13, domestic revenue grew just 4.5%, while overseas revenue grew 119%.This is largely a reflection of the order intake trend in FY12 - overseas intake was
up 215% while domestic intake declined 25%. In FY14, we expect domestic revenue
to grow 13% and overseas revenue to grow 9%, again a reflection of the 27%
increase in domestic intake in FY13 v/s 14% increase in overseas intake. We expect
overseas contribution to remain at 18-19% in FY14, similar to FY13 levels.
Domestic revenue growth declined sharply from 24% in FY12 to just 4.5% in FY13.
New projects that did not cross the 25% margin threshold accounted for a higher
share of overall revenue. We believe a large part of these projects should cross
the threshold in 2HFY14, leading to margin expansion. However 1HFY14 margins
could still remain constrained.
Constrained ordering in FY12 impacted domestic revenue in FY13; expect overseas contribution to stabilize
In FY13, domestic revenue grew just 4.5%, while overseas revenue grew 119%. This is largely a reflection of the order intake
trend in FY12 - overseas intake was up 215% while domestic intake declined 25%. In FY14, we expect domestic revenue to grow
13% and overseas revenue to grow 9%, again a reflection of the 27% increase in domestic intake in FY13 v/s 14% increase in
overseas intake. We expect overseas contribution to remain at 18-19%, similar to FY13 levels.
Domestic order intake healthy in FY13, but several projects did not cross margin recognition threshold
Domestic revenue growth declined sharply from 24% in FY12 to just 4.5% in FY13. New projects that did not cross the 25% margin
threshold accounted for a higher share of overall revenue. We believe a large part of these projects should cross the threshold
in 2HFY14, leading to margin expansion.
Source: Company, MOSL
Domestic E&C segment (INR b) Overseas E&C segment (INR b)
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