Maintain BUY on Larsen & Toubro - Inline performance, recovery awaited - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities.

Larsen & Toubro (Q4FY20): Inline performance, recovery awaited. Maintain BUY
(TP Rs 1,236, CMP Rs 957, MCap Rs 1,341bn)

Larsen & Toubro Ltd (LT) reported 5/8/4% miss in 4QFY20 Rev/EBIDTA/APAT. COVID-19 disruptions led to LT missing Rs 17.5bn of revenue and Rs 4bn of PAT recognition. Collections target fall short of Rs 15bn. The labour situation is improving now with 1.2lakhs labour at site vs 70,000 low and is expected to ramp upto 1.7lakhs by June-20 end and 2.2lakhs by July-20. LT continues to balance growth and NWC discipline and doesn't see achieving long term 10-15% growth and sub 23% NWC a challenge. Schneider deal is on track with likely closure by early 2QFY21, deal proceeds may partly get utilized towards rightsizing L&T Hyderabad capital structure. We believe 1HFY21 will be washout, but already in price. We maintain BUY on LT with SOTP of Rs 1,236/sh (vs. Rs 1,191/sh earlier).

Execution impacted by COVID-19, led to miss in growth guidance: LT missed booking Rs 17.5/4bn Rev/PAT due to COVID-19 disruption adjusted for same the FY20 Rev Growth would have been 8.8% close to 10-15% Rev growth guidance. Order inflow for 4QFY20/FY20 at Rs 577/1,860bn was marginally better than our estimate of Rs 1,833bn and 9% growth YoY in line with 10-12% order inflow guidance. International order booking drove this growth. NWC remains elevated at 23.8% vs 23.5/18% for 3QFY20/FY19.

Orderbook/New inflows at Rs 3.03/1.86tn: In a tough environment LT secured new orders worth Rs 1.86tn (9% growth YoY) largely driven by infrastructure orders. Whilst near term challenges remain on ordering with low crude prices in middle east and fiscal challenges domestically, LT refrained giving any guidance on inflows or revenue growth. The near term bid pipeline remain robust with strong prospects in Power T&D, Heavy Civil, Water and Heavy Engineering. LT removed ~Rs 290bn of slow moving orders including in AP and is pursuing collections of outstanding dues. We model for Rs 1.5tn new orders for FY21 a 20% de-growth YoY.

Balance sheet stable, capital realignment likely: LT has seen material deterioration in NWC from 18% in FY19 to 23.4% for FY20. Inflow from Schneider deal of Rs 140-150bn by 2QFY21 will be partly utilized toward right sizing L&T Hyderbad Metro capital to achieve sustainable debt levels in the project. LT finance, no further investment support from LT required as of now as it remains self sufficient to raise funds, no corporate guarantees to be extended by LT. Consol net D/E remains at 1.7x. LT maintain 18% RoE target for business except L&T Hyderbad & Nabha Power.

We maintain BUY on LT as its well placed to ride cyclical recovery. Strong balance sheet augurs well for supporting growth. Likely crude price recovery towards FY21E end will drive ordering sentiment higher. NWC is at peak and likely to improve from here. Key risks- (1) Delays in government infrastructure spend, (2) Delayed pickup in private sector spend and (3) Stressed payment cycles for government projects.

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.955.3 as compared to the previous close of Rs. 931. The total number of shares traded during the day was 247885 in over 10882 trades.

The stock hit an intraday high of Rs. 964.9 and intraday low of 937.5. The net turnover during the day was Rs. 235857492.

Source : Equity Bulls

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