Analyst Corner: Lower L&T estimates by 3-4%

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New Delhi | Published: January 16, 2019 2:27:55 AM

Orders from states/PSUs should continue based on past history of capex spending by states (fiscal targets a limited constraint) and reasonable leverage/capex plans of PSUs.

l&t, psuStates and PSUs account for two-thirds of L&T’s order backlog.

Orders from states/PSUs should continue based on past history of capex spending by states (fiscal targets a limited constraint) and reasonable leverage/capex plans of PSUs. The same has helped L&T grow business levels despite a slowdown in private sector investments and lack of support from the Centre. We note enabling conditions for a revival of private corporate capex and profitability that can meaningfully aid L&T’s PAT growth over time. We lower estimates by 3-4% on weak near-term order prospects; maintain fair value on roll-forward.

States and PSUs account for two-thirds of L&T’s order backlog. States’ spending has been less governed by fiscal deficit targets in the past and capex share in overall spending has been consistently increasing. Even PSUs, given their capex plans and limited leverage, should continue to order at a steady pace. Current fiscal constraints may limit orders in the near term from the Centre (15% share of the order backlog). Private sector’s share (both domestic and overseas) has reduced to 20% over the last three years, reflective of deterioration in demand conditions in core industries (power, steel) and later in services (real estate, IT, healthcare).

We see enabling conditions for recovery in private sector capex in (1) improving capacity utilisation, (2) modest leverage for BSE-500 (private sector) and (3) steady growth trends in demand (PMI). Our assessment of BSE-500 (private sector) suggests strong capex potential if the fixed asset base of `29 lakh crore starts growing fast. L&T presently gets Rs 20,000 crore of annual run-rate ordering from the private sector in a recurring capex of Rs 2.5 lakh crore per annum for the BSE-500 private sector companies. This capex is a derivative of an 11% CAGR in gross fixed assets over the past six years versus a 30% CAGR seen in the last upcycle (FY2005-12).

The incremental benefits of digitisation (tracking machine utilisation) should reflect in margin from hereon; benefits thus far have helped negate the impact of hardening commodity prices and worsening mix of revenues. (2) steady profitability at a double-digit revenue growth and 20% working capital would suffice to take care of dividends, capex and investments. (3) We also note the potential reduction in total tax outgo for the consolidated-ex services business if the loss-making Shipbuilding business gets merged into the parent.

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