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CMP: INR1,396
TP: INR1,721
Buy
Sales 614.7 EBITDA 64.1 Adj PAT* 49.3 EPS (INR)* 80.6 EPS Gr. (%) 3.3 BV/Sh (INR) 476.2 RoE (%) 16.2 RoCE (%) 14.3 Payout (%) 28.0 Valuations P/E (x)* 18.3 P/BV (x) 3.1 EV/EBITDA (x) 14.4 Div Yield (%) 1.3 *Consolidated
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 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.
Twin factors that impacted FY13 margins likely to turn favorable in FY14
Shareholding pattern %
As on Mar-13 Dec-12 Mar-12 Dom. Inst 36.3 36.8 36.6 Foreign 21.0 21.0 19.7 Others 42.7 42.3 43.7
Domestic intake growth in FY13 was higher than overseas; unlike FY12 when the difference 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 Contribution of overseas business to revenues Revenues 9.9 18.6 18.2 increased sharply in FY13; should stabilize in FY14
Satyam Agarwal (AgarwalS@MotilalOswal.com); +91 22 3982 5410 Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com) / Nirav Vasa (Nirav.Vasa@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.
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 E&C segment (INR b) Overseas E&C segment (INR b)
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.
We model E&C EBITDA margins to decline 75bps each in FY14 and FY15. However, there exist possibilities that near term margin will be supported by twin factors which impacted margins in FY13
Source: Company, MOSL
Some fruition of L&T's intent to increase its presence in overseas markets is evident, with the company achieving pre-qualifications (PQs) in bidding for several large projects: Urban Transport: PQs (part of consortium) for two metro rail projects (Doha and Riyadh Metro Rail; USD7b-8b each), freight corridor for Etihad Rail (USD11b), etc. Hydrocarbons: L&T has witnessed initial success, with orders of USD500m600m each from Saudi Arabia, Abu Dhabi and Oman in the last 18-24 months.
While the EBITDA margins in overseas business is meaningfully lower at 8%, we understand NPM is possibly not compromised given lower tax rates and better NWC cycle
Also, it received two orders of USD100m each from Thailand/Myanmar in 1QFY12/ 3QFY13 - an important geography addition. While the expected intake from the overseas market in FY13 was INR200b, the actual award was INR130b. Possible order intake of INR250b in FY14 (according to the management) from the overseas markets will entail a share of 1.5-2% in Middle East ordering, based on recent aggregate ordering trends (refer to our update, Overseas Juggernaut, May 2013). For L&T, a key structural trend is increasing contribution from the overseas business (expected to contribute ~45% of FY14 consolidated EPS), led by E&C and also IT/IES businesses. For the overseas E&C business, we remain skeptical on margins and risk profile. Competitive intensity remains high and the management has stated that overseas orders would yield significantly lower margins (~8%) than domestic orders (~12%). Given the initial learning curve in segments like metro rail, railways, etc, and new geographies, initial margins could remain volatile. Also, large size orders would increase concentration risks. This structural trend makes us more circumspect on the possible risk profile, also driven by our own lack of understanding on several of these variables.
20 June 2013
L&T: Gearing up the overseas juggernaut - possible 1.5-2% market share in Middle East v/s 0.25-0.5% in FY13! Expect strong growth in overseas order intake in FY14 Ordering in Middle East remains constrained (TTM)
20 June 2013
RoE (%) [Standalone] 22.0 RoE (%) [Consolidated] 22.6 Wkg. Capital(% of sales)# 7.1 # Adj for Subs Adv
16.2 15.0 15.0 16.8 15.5 17.2 19.9 Source: Company, MOSL
20 June 2013
(INR Million)
2015E 805,028 16.7 8,498 796,530 16.7 627,124 53,679 32,201 83,525 11.4 10.5 10,089 73,436 11,000 14,849 0 10 77,295 23,188 30.0 54,106 0 54,106 56,691 16.0
Balance Sheet
Y/E March Equity Capital Reserves and Surplus Net Worth Debt Deferred Tax Liability Capital Employed Gross Fixed Assets Less : Depreciation Add : Capital WIP Net Fixed Assets Investments Inventory Sundry Debtors Cash & Bank Loans & Advances Other Current Assets Current Assets Current Liabilities Net Current Assets Capital Deployed E: MOSL Estimates 20 June 2013 2010 1,204 181,912 183,116 68,008 774 251,899 72,901 17,916 8,742 63,727 137,054 14,154 111,584 14,319 60,365 63,532 263,883 212,765 51,118 251,899 2011 1,218 217,245 218,463 71,611 2,635 292,708 89,465 23,025 7,713 74,153 146,848 15,772 124,276 17,296 82,253 110,501 350,099 278,392 71,707 292,708 2012 1,224 251,005 252,229 98,958 1,330 352,517 105,544 29,495 7,587 83,636 158,719 17,766 187,298 17,781 91,280 120,448 434,574 324,411 110,163 352,518 2013 1,224 290,203 291,427 88,342 2,442 382,211 131,212 37,692 4,500 89,020 161,036 20,641 226,130 14,556 91,630 118,730 471,687 339,532 132,155 382,211
(INR Million)
2014E 1,224 321,459 322,683 120,000 1,330 444,013 138,631 47,046 4,500 96,085 157,951 20,476 259,362 36,225 115,518 151,428 583,009 393,032 189,977 444,013 2015E 1,224 359,949 361,173 120,000 1,330 482,503 149,631 57,135 4,500 96,996 187,539 23,896 302,681 1,782 127,000 176,508 631,867 433,899 197,968 482,503
(INR Million)
2014E 68,127 9,354 11,500 19,757 -19,343 49,881 -10,000 10,000 -30,110 -2,569 -32,679 0 5,000 11,500 13,071 -19,571 -2,370 38,595 36,225 2015E 77,295 10,089 11,000 23,188 -41,520 33,675 -11,000 0 -29,587 -2,569 -43,157 0 0 11,000 13,961 -24,961 -34,442 36,225 1,782 7
N O T E S
20 June 2013
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