>LARSEN & TOUBRO: 7 Reasons to buy

■ 7 Reasons to Buy — (1) Stock trades at adj FY13E P/E of 12.0x (2) inflow guidance miss already in price (CIRA at -6% & consensus at -5% to -11% v/s guidance at +5%) (3) despite inflow miss sales set to grow >=16.5% in FY13E (4) margin contraction fears overplayed (5) rationally India does not have a choice but to revive investment capex (if not in 6 months then atleast in 1 year) (6) huge backlog and strong B/S allows L&T to withstand slowdown and (7) consensus EPS downgrades have bottomed.


■ Sales should grow 16.5%+ in FY13E — As we believe from FY13E onwards execution cycle would not decline and could actually accelerate as power as a % of total pie comes down. This implies sales growth in FY13E should be >= backlog growth in FY12E (16.5%). L&T guiding 20% sales growth in FY13E would not surprise us.


■ Margin contraction of 100bps in FY12E and nil in FY13E — Management will not compromise on margins till L&T is able to win Rs700-800bn of orders annually. Even after excluding slow moving orders (10%) backlog would stand at ~ Rs1300bn (takes care of 2 years sales). Our confidence also bolstered by: (1) 9M12 margins contracting only 88bps; (2) not under-cutting to win orders evident from NTPC-DVC bulk tender.


■ India has to revive investment capex — Firstly, the skew between consumption and capital formation could structurally add to India’s inflation problem over longer term. So this has to be corrected. Secondly, to bring down the fiscal deficit, India needs to increase gross tax revenues which are highly correlated to GDP growth and therein lies the need for policy action to resume India’s infrastructure capex.


■ Maintain Buy; Target price of Rs1642 — Adjusting our target price to Rs1642 (Rs1647) to factor in: (1) revision in parent/ cons EPS by +1% to +7% (2) parent target P/E multiple 16x (from 17x earlier). Our EPS revision factors in (1) 0-1% higher sales and (2) 20-40bps higher EBITDA margins. L&T is now our top industrial pick given our previous top picks Havells and Cummins have run up significantly.


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