Maintain BUY on Larsen & Toubro - Growth returns - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Chintan Parikh, Institutional Research Analyst, HDFC Securities

Larsen Toubro (LT) reported revenue/EBITDA/APAT of INR 481/64/34bn, (5)/6/(5)% beat/(miss) to our estimate. Improvement in EBITDA margin and strong cash collections were the key positives from the result. With improving macro in international markets and government's focus on infrastructure at home, LT is hopeful of low to mid-teens growth in order inflow. We maintain BUY on LT, given its (1) strong order book (INR 3.3tn, ~3xFY21 core EPC revenue), (2) healthy balance sheet, and (3) robust services business. We cut our FY22 estimates by 9% to account for near-term execution challenges. We increase our SOTP-based target price to INR 1,800/sh (INR 1,657 earlier). Key risks: delay in asset monetisation and tepid order inflows.

Near-normal execution recovery: LT reported revenue of INR 481bn (+9%/+35% YoY/QoQ), 5% less than our estimates. Execution recovered to normalcy as revenue from core EPC business grew by 8%/53% YoY/QoQ. EBITDA came 6% ahead of our estimates. Increased productivity, improved utilisation in IT/ITES, and better profitability in transportation projects led to expansion of EBITDA margin by 171/126bps to 13.3% (vs 11.9% est.). Higher-than-expected taxes led to 5% APAT miss. With order book of INR 3.3tn, LT is aiming low to mid-teens growth in execution. While 60% of the OB is variable price, 40% fixed prices contracts have buffer to protect against higher commodity prices. LT is targeting steady margins in FY22.

Ordering in international/domestic markets to pick up: LT registered 12% YoY decline to INR 507bn in 4QFY21, as awarding was deferred. For FY21, order inflow de-grew by 6% YoY to INR 1.76tn. OB now stands at INR 3.3tn, providing three years of revenue visibility for the EPC business. Management believes FY22 will witness healthy ordering in both domestic and international markets. Total bottom up order pipeline stood at INR 9.6tn, of which 6.6tn is from domestic market. Infrastructure at 77% constitutes major share of the pipeline, followed by hydrocarbon at 17%. Order inflow guidance is also pegged at low to mid-teens. Recovery in key international markets, continuous focus on infrastructure by the government, and rebound in crude oil prices augur well for LT.

Balance sheet remains comfortable: Net debt reduced to INR 855bn (vs INR 998bn on Dec 20-end). Improvement in working capital led to robust CFO/FCFF of INR 228/219bn. To guard against the uncertainty, LT has kept cash reserves at elevated levels (INR 473bn). While IT business is generating robust cash flow, the recent rights issue has provided enough growth capital to LT Finance. E&C business would require capital to the extent of working capital. Hyderabad Metro would require INR 10/20bn support till the ridership picks up. With core business requiring limited investment, LT may reward its shareholders with higher dividends.

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.1386.85 as compared to the previous close of Rs. 1415.5. The total number of shares traded during the day was 322723 in over 14313 trades.

The stock hit an intraday high of Rs. 1441.05 and intraday low of 1368.5. The net turnover during the day was Rs. 450070326.

Source : Equity Bulls

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