Buy rating on L&T: Execution and order inflows offer comfort

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New Delhi | Updated: Jul 31, 2018 12:49 AM

Q1 raised concern on margins; upholding of guidance is reassuring; TP increased marginally to Rs 1,600

Buy rating on L&T: Execution and order inflows offer comfort

For a quarter mired in one-offs, accounting changes and segment reclassification, we limit our assessment to (i) good uptick in execution at steady working capital levels, (ii) strong ordering and order pipeline dominated by government spending and (iii) sustained focus on improving RoE. We retain our core business estimates and marginally increase SoTP to `1,600 on better performance of the services businesses. Buy

Q1FY19 comforting on execution and order inflows, disconcerting on margins

Reported consolidated-ex-services revenues/Ebitda/PAT grew 12.5/42/50% y-o-y on a high revenue base (last quarter prior to GST). Revenue growth was driven by the domestic segment and reaffirms L&T’s comfort on current working capital levels. Margin improvement (up ~200 bps y-o-y) needs to be seen in the context of a low y-o-y margin base and the key driver of higher real estate revenue booking. The key infrastructure segment margin declined 30 bps y-o-y in spite of a 10% growth in execution and lower MMH losses. The management attributed the same to job mix issues and increase in ECL provisions. Core E&C order inflows grew a healthy 35% y-o-y again on a low base and provide comfort on 12% growth guidance for FY19.

Q1 mired in one-offs, accounting changes and segment reclassification

Consolidated revenues grew faster at 17% y-o-y aided by gains from the sale of Kattupalli port. L&T also booked gains on InvIT transaction in IDPL (associate income). Cost one-offs consisted of provisions against advance and write-off of capital WIP of a sub judice real-estate project. Accounting changes related to Ind AS 115 now require L&T to book ECL provisions against both overdue receivables and on contracts assets on WIP. Lastly, L&T has made a new segment in defence engineering to house its defence and shipbuilding operations. It has also moved the MMH business into the infrastructure segment.

Upholds guidance and the strategy of improving RoE

L&T shared good ordering from the government in Q1FY19 and large `5.4 trn of pipeline from related sectors of water, transmission, urban infrastructure and transportation infrastructure. L&T (parent) would not be investing in IDPL for adding assets, thus limiting the scope of IDPL’s asset addition to the quantum realised from the recent InvIT listing. We retain our operational estimates and Buy rating and marginally increase our June-2020 EPS-based sum-of-the-parts (SoTP) to `1,600 (from `1,560) on higher valuation of service businesses.

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