20 October, 2008

Larsen & Toubro

Current market price: Rs 799.40

Target Price: Rs 1,209

Upside: 51.23%

Brokerage: Kotak Securities

Larsen & Toubro’s (L&T) net sales displayed a record strong growth of 40 per cent y-o-y in Q2 FY09 on the back of 41 per cent rise in the engineering and construction (E&C) business (which contributes 76 per cent to the total revenues).

The electrical segment has been observing lower off-take with revenue growth of 13 per cent. The revenues from the machinery and industrial products division grew by 16 per cent due to healthy demand for construction equipment and rubber making machinery.

The operating margins were under pressure with the increase in construction material costs, staff costs, costs pertaining to new initiatives of building its railways and power generation equipment business. With 70 per cent of its projects protected by price variation clause, the company’s margins are protected to a large extent.

Other income also grew on the back of treasury income gains and greater dividend payout by joint ventures and associates. Management expects to maintain the growth momentum of 30 per cent in revenues and order inflows in FY09. L&T is currently trading at 18.4x and 15.4x FY09E and FY10E consolidated earnings, respectively. Maintain Buy.