We upgrade Larsen & Toubro to outperform due to continued resilience in order growth, given its diversified presence across segments, market share gains and strong order prospects. We estimate 12.5% y-o-y standalone sales growth and a 50-bps margin decline (both below management guidance), given slow domestic execution and a deteriorating revenue mix.
Stake sale of non-core assets, improved execution in H2FY14 and continued order momentum could act as triggers. Flexible business model ensures resilience in order inflow growth. We expect L&Ts order growth to remain resilient. In the near term, we see strong order momentum from (a) the domestic rail segment, with estimated R2.1-lakh-crore order pipeline over the 2-3 years; and (b) the West Asian market. Hence, we believe the company will achieve its order growth guidance of 20% in FY14.
In our view, earnings are likely to recover (FY14-16E CAGR of 14%), given higher book/bill ratio (2.7x, as of March 2014E) and the likelihood of faster domestic execution following the general elections. We upgrade L&T with a target price of R965 (earlier R1,074). Strong order growth, stake sale in IDPL, and faster execution in H2FY13 could act as triggers .