Amaravati city boosts Larsen & Toubro stock rating to ‘Buy’; see why

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Published: January 15, 2018 4:22:39 AM

Recent order wins suggest growing momentum at Andhra capital, with trends likely to accelerate in FY19; L&T walking talk on plans; top pick in industrial sector

L&T has announced EPC order of Rs 22.65 bn for Amaravati development; future Amaravati order prospects range from Rs 0.5-0.6 trn.

L&T has announced EPC order of Rs 22.65 bn for Amaravati development; future Amaravati order prospects range from Rs 0.5-0.6 trn. The company announced the receipt of Rs 22.65 bn worth of EPC (Engineering Procurement and Construction) contracts from Amaravati Capital Region Development Authority (APCRDA) across verticals such as transportation infrastructure and water & effluent treatment businesses. We believe that the recent order, coupled with some earlier order wins in the region, could be the start of ordering activity by APCRDA, lending confidence on the overall prospects from Amaravati development.

L&T has also secured large housing orders in Amaravati recently; we expect the trend to further accelerate: L&T had earlier secured large orders in the housing segment for Amaravati Capital Region as listed below:
• Rs 13.24 bn orders from AP Township Infra Development Corp for construction of 22,000 residential units in Andhra Pradesh. This is covered under the PMAY (Pradhan Mantri Gram Sadak Yojana) scheme that focussed on affordable housing.
• L&T, NCC and Shapoorji Pallonji (unlisted) were awarded Rs 26.52 bn housing project. The project involves construction of apartments in towers for elected representatives and government officials. These orders highlight that Amaravati Capital Region order momentum is gradually gathering pace and that these awards are not isolated. We expect these trends to build further in FY19.

Our discussions with industry peers suggest Amaravati region development order prospects stand at >Rs 0.5 trn with over Rs 0.3 trn of tenders expected in FY19: Based on our interaction with several Hyderabad-based companies as highlighted in our earlier report we estimate that opportunities in excess of Rs 0.5 trn are available for development of Amaravati as the capital of the state of Andhra Pradesh following its bifurcation.

Based on our earlier interaction with NCC (NJCC IN, NR), we understand that Rs 0.3 trn worth of tenders/awards could happen in FY19. This will provide significant opportunities for companies such as L&T and NCC in our view.

We believe that the three key parameters on which investors assess L&T are order book growth, capital efficiency and execution/margin momentum.Over the past 24 months, we have seen visible efforts by L&T to focus on profitability vs. what we viewed as its skewed focus on order inflows earlier. We believe the company is walking the talk on its five-year strategy and, thus, maintain our Buy rating on the stock and highlight it as our top pick in India’s industrial sector.

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