L&T’s EBITDA was below expectations given higher NPA provisioning in L&T Finance and lower consolidated E&C margins. Profit came in higher driven by lower interest costs and tax rate. We have marginally raised our FY18e-19e EPS by 1-4% and rolled over E&C multiple to 16x EV/Ebitda FY19e v/ s FY18e. Management remains ROE focused, reflecting in reduced E&C working capital to 19% of sales v/s 23% y-o-y. Remain positive with a TP of Rs 2,300.
Analyst meet macro view
Management has guided for 12-14% y-o-y order flow growth, 12% y-o-y revenue growth and 0.25% margin improvement. FY17 order flow was up 5% y-o-y and there was 10% y-o-y rise in Q4FY17. Infrastructure rising 10-12% y-o-y and orders from 17 GW of unfinished power plants are expected. Interestingly, management highlighted railways capex is moving slowly with station redevelopment and safety strengthening being the two upcoming areas of work. Private sector capex is absent and Middle East has a mixed outlook. Defence was one area where management is very optimistic. Visibility on at least $4-5 bn orders on their annual $25 bn FY18e asking rate is present.
E&C execution up 13% y-o-y in Q4
We were looking forward to double digit revenue growth in consolidated E&C segment after just 6% y-o-y rise in 9MFY17. Consol E&C Ebit margins are higher just 30 bps y-o-y to 11.7% and 10 bps in FY17 to 7.9%. We believe as domestic revenue drives execution, FY18e-19e should see 50-100 bps margin improvement.
Macro tailwinds needed for upside
L&T has begun its ROCE/ROE improvement journey from its FY16 bottom. However, we believe the first leg of upside linked to company-specific improvements has been seen, with double digit order flow growth needed for the next leg henceforth.
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Our January 20 report highlighted that capex cycle is showing signs of troughing and announcements should begin by 1HCY18 with L&T a key beneficiary. Maintain Buy with a revised SOTP-based PT of Rs 2,300.