L&T’s order inflow has increased at a CAGR of 41.3% during the last three years. The order book at Rs527 billion as on 31 March 2008, stands at 2.1 times the FY08 revenues.
We expect this momentum to remain intact driven by the shift in the Company’s strategy towards high growth sectors such as oil and gas, power, shipbuilding, besides infrastructure. We expect the order inflow to grow at a CAGR of 20.4% over the next five years.
However, in the current scenario of rising interest rates and escalating prices of construction materials the margins are likely to be under pressure in the short term.
We believe the company’s efforts towards efficient project management, judicious selection of order, timely execution and cost optimization will help in pulling up the margins in the long term.
In line with our expectations, we expect consolidated EBITDA margin to fall by 27 bps to 12.1% in FY09E and improve thereafter by 30 bps to 12.4% in FY10E.
We have valued the Company using SOTP valuation methodology. Based on this, our target price of Rs2,853 reflects a potential upside of 20.6% from the current market price. We reiterate our BUY rating.