Larsen & Toubro - Resilient, despite the challenging outlook - ICICI Securities

Larsen & Toubro (L&T) posted better than expected margins, especially under the key infrastructure segment, and was able to control liquidity to a large extent despite the macro challenges. The dependence on large orders given their size, subdued private sector capex and near to medium term spending constraints on state and Central governments is likely to impact the order intake outlook. Overall order prospects are at Rs6.3trn, with Rs5.1trn coming from the domestic market, which provides visibility. We expect substantial ordering to emerge in certain sectors like railways, road, metro, oil & gas, etc. in the domestic market. Revival of crude prices will be a key determinant of Middle East order growth. Factoring-in the near term growth challenges, we cut consolidated earnings by 8.6% and 4.6% respectively, for FY21E/FY22E. Maintain ADD with a revised SoTP-based target price of Rs1,027 (previously: Rs1,040).

- Stable infra margins despite low execution: Infra revenues declined 53% YoY to Rs64.6bn though infra margins were flat at 6.3%, which is a positive surprise. Some of the factors we believe that led to this are: (i) overhead expense savings (Rs2bn savings in SG&A, despite Rs1bn increased overheads from Mindtree); (ii) absence of any major provisions that were there during Q1FY20; (iii) higher proportion of design-type projects, which carry relatively higher margins; and (iv) lower commodity prices.

- Order deferment and muted near-term outlook pose growth challenges: While overall order intake declined 39% YoY to Rs236bn, ex-services it fell 55% YoY to Rs137bn. Domestic order intake was down 50% YoY to Rs147bn with support from activity in water, heavy civil, and power T&D segments. International order intake stood flat YoY at Rs89bn led by infra, hydrocarbon and heavy engineering. Management estimates Rs6.3trn of ordering prospects split into Rs5.07trn in domestic and Rs1.24trn overseas. Although the ordering pipeline seems promising, we believe, given the large base, there is limited room to grow order intake in FY21E.

- Higher finance cost impacts earnings: Finance cost increased 80% YoY partly due to full commissioning of Hyderabad metro and partly due to Rs126bn increase in borrowings as the company shored up its liquidity given the pandemic uncertainty. However, most of the incremental borrowings are still in cash and the working capital was under control despite the overall headwinds, which strengthens the balance sheet.

- Social distancing norms to impact near-term execution and increased labour cost to limit margins: Of the 950 operational project sites of L&T, ~95% are currently active; although current manpower strength has improved to 190,000 from lows of 70,000 during lockdown, productivity is expected to remain impacted due to adherence to social distancing norms. Company is adding 1,500-1,600 workmen every day and is expected to soon reach an optimum labour strength of 220,000 to 230,000.

- Maintain ADD on strong orderbook and balance sheet: We believe both state and Central governments will soon start focusing on investment towards infrastructure building and job creation. This can likely ramp up order intake from the overall public sector; however, L&T's high base and its dependence on large infrastructure projects can cap near-term growth in order intake. Given strong balance sheet, cash infusion post consummation of Schneider deal and control on working capital, we maintain ADD on the stock with a revised SoTP-based target price of Rs1,027 (earlier Rs1,040).

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.916.35 as compared to the previous close of Rs. 920.95. The total number of shares traded during the day was 454308 in over 21935 trades.

The stock hit an intraday high of Rs. 937.8 and intraday low of 910.25. The net turnover during the day was Rs. 419489883.

Source : Equity Bulls

Keywords