Maintain BUY on Larsen & Toubro - Bottoming out; order pick-up awaited - HDFC Securities

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

L&T reported 5%/37% beat on our revenue/APAT estimates, supported by resilient performance in services business. Labor availability has recovered to near-normal level for monsoon season. Despite 39% YoY decline in order wins in 1QFY21, order book (OB) of Rs 3.05tn provides visibility for more than two years of revenue at FY20 level. We maintain BUY on Larsen & Toubro Ltd (LT) as it is well-placed to ride out the pandemic, given its (1) strong order book, (2) healthy balance sheet and (3) robust services business. Key risks: (1) delays in government infrastructure spending, (2) delayed pick-up in private sector spend and (3) stressed payment cycles for government projects. We cut our FY21/FY22 estimate by 7.6/2.5% to account for increase in finance cost. We raise TP to Rs 1,260 (1,235 earlier), increase primarily driven by services valuation.

Topline supported by services business: LT reported revenue of Rs 213bn beating our estimate by 5%. While revenue from core EPC business fell by 47% YoY, services business remained robust with IT & ITES registering growth of 58% YoY and finance clocking de-growth of 5% YoY. Depreciation and finance cost rose sharply by 46% and 80% YoY respectively. APAT came in Rs 1.3 bn beating our estimate by 37%.

Ex-services orders decline by 55%; order backlog at Rs 3.05tn: LT reported order inflow of Rs 236bn, decline of 39% YoY. Ex-services order inflow fell more sharply, by 55% YoY, taking OB to Rs 3.05tn. Management sees ordering prospect of Rs 6.32tn with domestic market contributing Rs 5.1tn, mainly from water, power T&D and affordable housing segment. Crude prices will drive international ordering. We expect order inflow of Rs 1.5tn in FY21 and Rs 1.6tn in FY22.

Near-normal level of labor, strong OB to could lead execution recovery: Labor availability has improved from the low of 70k during the lockdown to 1.9L in mid-July, which is adequate for monsoon season, as per management commentary. L&T is expecting labor situation to normalize in 2-3 quarters. Although there are challenges in ramping up execution due to social distancing, we believe the near-normal level of labor, coupled with a diversified and robust OB of Rs 3.05tn, could lead to recovery in execution recovery. We expect L&T to report revenue of Rs 1.4/1.53tn in FY21/FY22.

Balance sheet stable: Net working capital (NWC) as a percentage of sales rose sharply to 26.8% during the quarter from 23.9% in 1QFY20. However, absolute increase in NWC was marginal and was impacted by lower denominator. Management emphasized focus on liquidity and iterated that execution will largely be a function of cash collection to keep working capital in check. Although gross debt rose to Rs 1.55tn from Rs 1.41tn at the end of FY20, net debt remained stable as the company increased liquidity for repayment and uncertain times ahead.

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.904.55 as compared to the previous close of Rs. 916.35. The total number of shares traded during the day was 255758 in over 11401 trades.

The stock hit an intraday high of Rs. 916 and intraday low of 898.3. The net turnover during the day was Rs. 231280672.

Source : Equity Bulls

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