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Larsen & Toubro Ltd Research Report - 02nd Feb 2016

Infrastructure | Published on Feb 02nd 2016


Standalone numbers disappoint: For 3QFY2016, Larsen & Toubro (L&T) reported 1.5% yoy decrease in its top-line to Rs14,774cr, reflecting revenue de-growth across Infrastructure and Others segments. The EBITDA margin for the quarter is down 368bp yoy to 6.8%, on account of surge in SAO and employee expenses. The PAT came in at Rs791cr, down 25.3% yoy, reflecting poor operational performance. Order inflows for the consolidated entity in 9MFY2016 declined 13.2% yoy to Rs93,524cr. The order backlog stands at Rs2,56,458cr, thereby giving revenue visibility for over the next 10 quarters. Hydro-carbon reports minimal losses: Despite completion of legacy projects in the international business, strong execution of ongoing projects helped the Hydro-carbon segment report revenues of Rs2,184cr in 3QFY2016. For the quarter, this segment reported a turnaround in its EBIT to Rs39cr vs a loss of Rs137cr in 3QFY2015. On the whole, this segment ended 9MFY2016 with an EBIT level profit of Rs77cr. Key Positives: Surprise on the order inflow numbers for the quarter, turnaround in the Hydro-carbon segment; net WC cycle at 24% of sales. Key Negatives: Lowering of order inflow guidance for FY2016, revenue degrowth in 3QFY2016. Outlook and valuation: L&T’s diversified presence and an anticipated recovery in the capex cycle coupled with the company’s strong balance sheet comfort us that it is well positioned to benefit from a revival in the award activity environment. With order backlog expected to grow, execution should pick-up gradually. We have valued the company using the sum-of-the-parts (SoTP) methodology, to capture the value of all its businesses and investments. Ascribing separate values to its parent business (on a P/E basis) and investments in subsidiaries (using P/E, P/BV and M-cap basis), we arrive at FY2017E based target price of `1,310. We are of the view that L&T is a good proxy play for investors wanting to ride on the revival of the Indian infrastructure growth story. Given the 16.7% upside potential in the stock from the current levels, we maintain our BUY rating on the stock.

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CMP 1,122
Target Price 1,310
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others33.0
Grand Total100.0

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