Stock corner: ‘Buy’ on Larsen & Toubro with target price of Rs 1,830

Like-for-like PBT growth flattish, lower tax rate leads to earnings beat: Including the consolidation of MindTree, revenue grew 15.2% y-o-y to Rs 35,300 crore. Ebitda increased 13.6% y-o-y to Rs 4,020 crore with the margin at 11.4% (-10bp y-o-y). Reported PBT increased 7% y-o-y; however, excluding the MindTree acquisition, growth was flattish at 1.5% y-o-y. LT availed the benefits of lower tax rates, as a result of which adjusted PAT increased 28.4% y-o-y to Rs 2,300 crore.

Including the discontinued E&A business, reported PAT came in at Rs 2,530 crore (+13.3% y-o-y), 15% ahead of our estimate. H1FY20 performance: Revenue grew 12.6% to Rs 65,000 crore, whereas Ebitda grew 16.5% y-o-y to Rs 7,340 crore. Helped by a lower tax rate of 26.6% for H1, adjusted PAT growth stood at a strong 28.5%.

Core E&C revenue growth of 8.4% y-o-y trailed our estimate of 12.3%, particularly as ~Rs 16,000 crore of orders pertaining to Andhra Pradesh and Mumbai coastal road projects are slow moving. However, we note that despite the adverse macro environment and the tight liquidity conditions, the domestic E&C business grew at 14% y-o-y, driven by growth of 13% in the domestic infra segment and 46% in the domestic hydrocarbon segment — a key positive takeaway. Core E&C Ebitda margin was flat y-o-y at 8%, due to which the operating performance in the core business was below our expectation.

Order inflows surprised positively with a growth of 20% y-o-y to Rs 48,300 crore. Core E&C order inflow growth was robust at 16% y-o-y. We believe LT is well placed to meet its order inflow guidance of 10-12% y-o-y for FY20. This implies an ask rate of 6-10% in the remaining six months. The bid pipeline remains strong at Rs 5.2 lakh crore. Working capital as a percentage of sales deteriorated to 23% from 20% in H1FY19 (FY19: 18%).

This is largely attributable to the liquidity crunch for the industry. We cut our core E&C EPS estimate by 3.4%/2.6% for FY20/21. Consolidated EPS remains largely unchanged. Our target price stands at `1,830 (prior: `1,900). Buy.