‘Neutral’ on L&T,but margins still a concern

Over the past few months,much has been made out of L&T’s strong bid pipeline in West Asia,including an $8-billion Doha metro order,an $8-billion Riyadh metro order,an $11-billion Etihad Rail project and several road and infrastructure orders.

Written by Nomura | Published: June 22, 2013 5:16:04 am

Over the past few months,much has been made out of L&T’s strong bid pipeline in West Asia,including an $8-billion Doha metro order,an $8-billion Riyadh metro order,an $11-billion Etihad Rail project and several road and infrastructure orders.

However,with award details for some of these projects starting to come out,it seems that L&T has not been too successful in the geography yet. While it has emerged successful in about R7,000 crore worth of road projects in Abu Dhabi and Oman,the pricing appears to be very aggressive compared to previous packages of the same projects and looking at the competition.

We remain concerned about L&T’s deteriorating margin/ROE profile over FY14/FY15 and maintain our ‘neutral’ rating on the stock. Our target price remains R1,505. While the new contracts boost confidence in the company’s FY14 order inflow guidance,we note that these projects were keenly competed by 11-18 firms each.

Importantly,the pricing between L&T’s bids and the bids by the local companies was very different (L&T’s bids being lower by approximately 10% vs the lowest local bidder). Also,we note that the average per km value of package numbers 4-6 (where L&T is L1) is lower by approximately 5% compared to the average of the first three packages awarded for the same expressway last year. As such,we reiterate our concerns on poor margins from these contracts.

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