Orders in spate

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SummaryL&T continues to surprise on order inflows– but with the relative P/E (price-to-earning ratio) at 1.33x (times) and margin pressure coming through, the stock seems fully valued.

Slow capex in economy for next two years could weigh down on company

L&T continues to surprise on order inflows– but with the relative P/E (price-to-earning ratio) at 1.33x (times) and margin pressure coming through, the stock seems fully valued. The TINA (there is no alternative) factor and exceptional management quality keep us EW (equal weight).

Raising EPS estimates by 1-2%: With 22% order inflow growth in 9m(month)FY3, L&T is on its way to meeting its guidance. We move our order inflow growth estimate up slightly (to 17% year-on-year) to account for the surprise in this quarter. However, given the increase in slow-moving orders, and the higher than expected margin decline, our EPS (earnings per share) goes up only 1-2% for F13-14e (estimates). Our valuation of the base business moves up by 5%, but given the strong rise in subsidiary values (mainly finance and IDPL), our target price moves up 8% to R1,555, implying 2% downside from current levels.

Challenges still high: With elections coming up in F14e, we expect public capex to start drying up. Private sector capex seems likely to start up only from FY15e (post-election year). Along with the rest of its peers, L&T continues to highlight high competitive intensity, which we believe will continue to bring margin pressure over the next 6-12 months. Against this backdrop, we stay EW.

Disappointing margins: The broad P&L (profit and loss) numbers were weaker, with L&T increasing sales by 10% y-o-y, 2% behind our estimates. Margins slipped 20 bps y-o-y (on an already low base), to 9.6%, 70 bps (basis points) lower than our expectations, which meant that Ebitda (earnings before interest, taxes, depreciation and amortisation) came in 9% lower than our expectations. Strength below the line (high other income led by real estate sales) coupled with lower tax rates helped the net profits (up 10% y-o-y) come in only 1% below our estimate. Another worrying issue remains the build-up of slow-moving orders. While the metric tracked by L&T was flat quarter-on-quarter at 11%, we prefer to use the 14% number, which includes the GMR and GVK mega road projects, in which the companies have submitted termination notices to the National Highways Authority of India.

What could change our view? We could become more bullish if policy action continues to come through, especially a resolution on the fuel security for utilities, or easing of environment clearances. On the other hand, a step back on some

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