Larsen & Toubro - Treading cautiously - ICICI Securities

Larsen & Toubro (L&T) declared only 31% from the net proceeds of the E&A sale to Schneider as special dividend, and allocated the remaining amount of Rs56bn partly towards debt repayment and the rest towards the services segment and Hyderabad metro. Though working capital improved to 26.7% in Q2FY21, it remains higher than normalised levels and this is impacting the overall core RoCE. Macro growth outlook is limping back to normalcy and the company has recently received letter of intent for the high-speed rail project. Overall order prospects for H2FY21E are at Rs6.1trn, with Rs4.8trn coming from the domestic market, which provides order intake visibility. We expect ordering focus to emerge in certain domestic sectors like railways, road, metro, oil & gas, etc. Revival of crude prices will be a key determinant of Middle East order growth. Factoring the in-line performance, we marginally cut earnings by 1% for FY21E/FY22E and maintain ADD on the stock with a revised SoTP-based target price of Rs1,042 (previously: Rs1,027).

- Gradual opening up of the economy to aid growth: L&T was able to mobilise manpower and most of its sites have started operations though execution is slow due to social distancing. Assuming no further lockdown-related risks, operations are likely to normalise by Q4FY21 though, given the unpredictability of the pandemic, the management has not given any guidance.

- Orders deferred in the domestic market, but showing signs of pick up: While overall order intake declined 42% YoY to Rs280bn for Q2FY21 and 41% for H1FY21, the company recently received letter of intent for high-speed rail order. Ordering activity is likely to pick up on the back of metro, water, hydrocarbons, etc. going forward. Management estimates Rs6.1trn of ordering prospects split into Rs4.8trn domestic and Rs1.3trn international during H2FY21. Although the ordering pipeline seems promising, we believe, given the large base, there is limited room for order intake growth in FY21.

- Proceeds from E&A deal has shored up the balance sheet: L&T has received net proceeds of Rs81bn from the Schnieder deal post adjusting for tax, debt and other expenses. It has announced 31% of this as special dividend and earmarked Rs20bn toward refinancing of Hyderabad metro, ~Rs50bn towards debt repayment and ~Rs20bn towards financing of L&T Finance, etc.

- Cashflow from operations have improved; yet to reach normalised levels: Q2FY21 witnessed turnaround in cash from operations supporting the overall cashflow; however, it has not yet reached normal levels. With the easing out of liquidity and improvement in execution, the management expects the cashflow improvement trend to continue.

- Maintain ADD on strong orderbook and balance sheet: We believe both Central and state governments will start focusing on investment towards infrastructure and job creation. Restart of ordering activity on large multilateral projects such as high-speed rail is expected to fuel demand and aid ordering from similar projects in metro, water segment, etc. Given the strong balance sheet, cash infusion from the Schneider deal and control on working capital, we maintain ADD on L&T with a revised SoTP-based target price of Rs1,042 (earlier Rs1,027).

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.929.6 as compared to the previous close of Rs. 934.6. The total number of shares traded during the day was 233186 in over 11248 trades.

The stock hit an intraday high of Rs. 947.15 and intraday low of 924.15. The net turnover during the day was Rs. 217832632.

Source : Equity Bulls

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