L&T and Tata consortium have emerged as L2 and L1 bidders for the Mumbai Trans harbour (MTHL) contract. This combined with the ground breaking ceremony for the bullet train and movement on several other large opportunities suggests ordering visibility has improved. We build 6% inflow growth and that is still in range. News reports suggest that L&T is also working on several key divestitures, e.g., commercial real estate in Seawoods, Infrastructure investment trust in roads and sell down of the Electrical business. Electrical business realisation can be Rs 140-160 bn.
Q1 had strong domestic infrastructure execution and we watch for the same in context of GST disruption. Tweak FY18-20E EPS by -1/+2% and change target price to Rs 1,425 on rollover to Sep’19e and higher market price of L&T Finance. Stay Outperform on domestic execution pick-up, steady.
Stay Outperform on domestic execution pick-up, steady Middle East, potential gains from divestment, strong cash flows with efficiency in working capital, reasonable valuation at 19x P/E and 12X EV/Ebitda on FY19E consolidated EPC business. Key risk is margin erosion on delays while absence of cycle can cap upside. Visibility improves on Mumbai trans-harbour opportunity. L&T (in JV with Japanese company IHI Corporation) has emerged as the likely winner for two of three packages of the MTHL project (85% JICA funded), with potential order inflow of Rs 70 bn. The awarding could take some time as bids are higher than the government’s estimate. While the Tata consortium is L1 for both main packages, each consortium can get only one package, giving L&T a chance to get one package as an L2 bidder. The concept of least difference may mean that L&T can get a larger package as its difference (vs. L1 bid) is smaller in that one.
The concept of least difference may mean that L&T can get a larger package as its difference (vs. L1 bid) is smaller in that one. Bullet train can also be an opportunity like western DFC . The Rs 1,000 bn Mumbai-Ahmedabad bullet train project will also create EPC opportunities. Typical requirement of having a Japanese consortium in the lead for such projects narrows the competition and benefits L&T. L&T (via JV with Sojitz) already has the majority of work on the Western Dedicated Freight Corridor (DFC) project (total +Rs 120 bn).
Sedate order inflows to date
L&T had guided for 12-14% inflow growth in FY18E. In comparison, we build 6% inflow growth into our estimates including 4% growth in the EPC businesses. Q1FY18 order inflows were weak at Rs 264 bn, down 11% y-o-y. Since then, L&T has announced inflows of Rs 80 bn. Electrical business sale in making News reports suggest that sale of the electrical and automation (E&A) business is in its final stages at a valuation of Rs 140-180 bn. L&T reported Rs 54 bn of revenues with Ebit of `5.5bn (10% margins) from this segment in FY17. Valuation at the mid-point of the reports would suggest a multiple of 23-24x FY19E EPS. A deal at the mid-point would be Rs 30 higher than our current valuation.