Larsen and Toubro’s (L&T) net sales for Q1’09 surged an impressive 53.2% y-o-y on the back of a strong order backlog and a higher execution rate.
EBITDA margin improved 20 bps due to operating leverage, even though variable expenses rose significantly.
The order book, at Rs582 billion as on 30 June, 2008, stood at 2.1 times the trailing twelve months (TTM) revenues. We expect the momentum of order inflows to remain healthy owing to the expanding infrastructure and increasing industrial CAPEX.
Moreover, we believe that the strategy to shift towards the high-growth regions such as the Middle East will help in countering growth moderation in India. We expect the order inflow to grow at a CAGR of 27.5% over the next two years.
In the current scenario of escalating prices of construction materials, margins are likely to remain under pressure in the short term. However, in the long term, we believe that the L&T’s efforts towards efficient project management, judicious selection of orders, timely execution, and cost optimization will help in pulling up the margins.
Consolidated EBITDA margin are expected to fall by 20 bps to 12.1% in FY09 and improve thereafter by 30 bps to 12.4% in FY10.
We expect the company’s consolidated revenue and net profit to grow at a CAGR of 34.5% and 36.4%, respectively, over FY08-10. However, we expect the consolidated EBITDA margin to fall by 20 bps from the present levels in FY09E.
There has not been any major change in the Company’s fundamentals and its growth momentum remains intact. Based on SOTP valuation technique, our fair value estimate of Rs2,812 reflects limited upside potential. Hence, we downgrade our rating from Buy to HOLD.