We met L&Tís senior management, which remains confident on order inflows and E&C margin guidance, and expects revenue growth to pick up in 2H14. L&T is now trading at GFC valuation, at 10x FY14E earnings. Our stress case analysis suggests that L&Tís current valuation builds in close to zero earnings growth in perpetuity.
Our stress case builds in no order inflow growth from FY15, margins to decline by 150bps and working capital to expand further by 25%, apart from missing on all guidance parameters in FY14. The current price values the core business at 10x FY14E stress case earnings ó the same multiple from where the stock rebounded during the financial crisis and Dec 2011 lows.
L&T is on track to achieve 20% growth in FY14 order inflow, as 1H orders are likely to be at R50,000 crore, ~50% of the target Ė and 2H is usually a much bigger period for orders. Management expects domestic building & factories orders to continue and is well-placed in some power & ME transportation orders.
As per L&T, revenue growth of 5% in Q1 was more or less in line with internal budgets and the company has factored in an improvement in 2H to achieve 15% revenue growth target.
The company has rebounded from ~10x one-year-forward PER twice in the last 10 years ó the GFC and Dec 2011 ó close to the valuation lows it had hit in 2003, when it traded at 8x PER. However, L&Tís balance sheet is in a much stronger position than 2003, justifying some premium. We maintain outperform with price target of Rs 1,198 as its quality is unmatched in the space.