Larsen & Toubro Rating – ‘Buy’: A beat on order inflow and EBITDA

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Published: February 4, 2019 3:29:50 AM

L&T’s execution ramp-up is important as it gives credibility to its order book. 9MFY19 consolidated E&C execution was 19% y-o-y while margins were flat y-o-y.

Management has maintained its 10-12% y-o-y order flow growth, 12-15% y-o-y revenue growth and stable to 0.25% margin guidance for FY19e.

Q3FY19 has beaten expectations on order flow and Ebitda. Order flow was down 12% y-o-y in Q3 and up 17% y-o-y in 9MFY19. Biggest positive is the 24% y-o-y consol E&C revenue growth, which is 17% even ex of realty segment. Rs4 bn provisions on problematic projects hit Q3 consol E&C margins, which were 9.2% vs 9.1% y-o-y and ex-realty 6.7% vs 8.2% y-o-y. However, even ex-realty E&C margins are flat y/y for 9MFY19 at 7.9%. Maintain Buy with PT of Rs1,925.

Domestic orders up 20% y-o-y in 9MFY19
Management has maintained its 10-12% y-o-y order flow growth, 12-15% y-o-y revenue growth and stable to 0.25% margin guidance for FY19e. Q3FY19 domestic order flow declined 22% y-o-y on a high base. Management in the conference call mentioned that awards worth Rs200 bn mainly in Transportation Infra, Heavy Civil Infra and Power business have been deferred in the quarter. Prospect pipeline remains strong at Rs1,600 bn of which Rs1,000 bn is in the infra segment and Rs300 bn is in Power, of which Rs250 bn is T&D. International order flow improved during the quarter and was up 30% y-o-y and is up 7% y-o-y in 9MFY19. To meet the higher end of the order flow guidance, the company needs just 2% y-o-y growth in Q4, which we believe should not be tough to achieve as management highlighted a strong Q4 pipeline.

18% y-o-y rise in infrastructure segment revenue in 9MFY19

L&T’s execution ramp-up is important as it gives credibility to its order book. 9MFY19 consolidated E&C execution was 19% y-o-y while margins were flat y-o-y. Management highlighted they are seeing traction in the infra segment specially in Roads, Metro Rail, Water Resources and Irrigation. Our note dated 15th Jan 2019, also highlighted the same and points to double digit growth in overall infra+ capex spends for the next three years. We believe L&T should benefit from this double-digit growth between its sectoral and geographical diversification.

Reality of the election overhang
We believe over the next 12 months, as the election outcome is behind it, L&T’s core business model strength, which has done well even when political outcomes have not been favourable, will come to the fore. On the buyback, management mentioned that they don’t see it as a closed option to return money to shareholders and will discuss further with SEBI.

Valuation/Risks
Maintain Buy with a SOTP-based PT of Rs1,925, valuing the core business at 16x EV/Ebitda FY20e. Risks: Prolonged delay in domestic capex recovery.

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