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Larsen & Toubro Ltd Research Report - 03rd Aug 2016

Infrastructure | Published on Aug 03rd 2016


Standalone numbers impress: For the quarter, L&T reported lower than expected, 6% yoy increase in its top-line to Rs11,973cr. Revenue growth on yoy basis reflects 59.7% increase in Power segment and 14.1% decrease in Others segment. L&T reported 31bps EBITDA margin expansion to 6.6%. L&T reported Adj. PAT of Rs597cr, reflecting 5.0% margins, same as the year ago levels. Consolidated Order inflows grew 14.0% yoy to Rs21,874cr. Order backlog stands at Rs2,57,427cr, thereby giving revenue visibility for next 10 quarters. Roll-out of Ind-AS impacts profitability: Roll-out of Ind-AS, led L&T take ~Rs150cr of provisions towards exp. credit loss (ECL) and ~Rs100cr towards employee performance linked incentives. These 2 impacted in addition to higher borrowing costs, re-classification of net actuarial gains, valuation of investments, impacted profitability. Provision for ECL is in addition to normal provisions undertaken. L&T took Rs100cr inventory write-down and another Rs180cr towards foreseeable loss in 1QFY17E. Considering the (1) strong operational performance (mainly in the Power, Heavy Eng, IT & Tech. Services, Infrastructure), (2) Order Inflow growth and strong bid pipeline, we expect L&T to have fair chance of attaining FY2017E guidance on both, the revenue and margin side (even on new Ind-AS). Key Positives: Strong 14% yoy Order Inflows, Margin improvement, net WC cycle maintained at 23.5% of sales. Key Negatives: Below than expected revenues for the quarter. 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 revival in the award activity environment. With order backlog expected to grow, execution should pick-up gradually. We have valued L&T using sum-of-the-parts (SoTP) methodology, to capture the value of all its businesses and investments. Ascribing separate values to its parent business (on P/E basis) and investments in subsidiaries (using P/E, P/BV and M-cap basis), we arrive at FY2017E based target price of Rs1,700. We are of the view that L&T is good proxy play for investors wanting to ride on the revival of Indian Infra growth story. Given the 13.0% upside, we maintain ACCUMULATE on the stock.

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CMP 1,504
Target Price 1,700
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others33.0
Grand Total100.0

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