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Larsen & Toubro - Healthy margins, metro impacts cashflows - ICICI Securities

Posted On: 2021-01-27 09:02:19 (Time Zone: Arizona, USA)

Larsen & Toubro (L&T) witnessed healthy margins in Q3FY21 and execution is gradually returning to normalcy. Strong order intake was the key highlight of the quarter. Hyderabad metro operations continue to be under stress with ~Rs4.5bn of cash burn per quarter, and this is impacting overall cashflows. Working capital is stable and L&T continues to support its suppliers given the continuing liquidity challenges. Orders worth ~Rs32bn for high-speed rail project and a mega order (>Rs70bn) from HPCL Rajasthan refinery were booked in Q3FY21; order pipeline for Q4FY21 is at Rs2.65tn. Factoring-in the better than expected performance, we raise consolidated earnings by 0.7%/8.8% for FY21E/FY22E and introduce FY23E estimates. Maintain ADD with a revised SoTP-based target price of Rs1,457 (earlier: Rs1,254).

- 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 given social distancing. Assuming no further lockdown-related risks, operations are likely to normalise by Q4FY21-end; however, given the unpredictability of pandemic, management avoided giving any guidance.

- One-off in realty boosts margins: A one-off of Rs3.4bn in realty from sale of assets at phases-2&3 of Bangalore and phase-2 of Navi Mumbai boosted overall margins. Activity was largely seen in mid-ticket projects and L&T expects it to continue for next 2-3 quarters.

- Overall order intake boosted by three large orders: Ex-services, order intake nearly doubled at 110% YoY supported by three large orders, including two large HSR orders worth Rs320bn and a HPCL Rajasthan refinery order for >Rs70bn in Q3FY21. We expect ordering activity to pick up led by metro, water and hydrocarbon projects among others, going forward. Management estimates Rs2.65trn of ordering prospects for Q4FY21, with a large portion (Rs2.2trn) from domestic markets while the remaining ~Rs400bn prospects internationally are largely from water and T&D space.

- Cash burn of ~Rs4.5bn per quarter at Hyderabad metro: The low ridership at Hyderabad metro is impacting overall cashflows as the company has to infuse cash at the rate of ~Rs5bn per quarter. Although it has kept aside Rs20bn for its refinancing from a portion of E&A sale proceeds, we expect this trend to continue impacting cashflows in the near term unless a restructuring plan is worked out.

- Stable working capital; support to suppliers continue: Q3FY21 witnessed improvement in cash from operations and the management guided towards flat YoY net working capital for Mar'21. Collections have improved and advances from customers have increased; however, given the liquidity scenario, L&T continues to support its suppliers.

- Maintain ADD on strong orderbook and balance sheet: We believe both state and Central governments will start focusing on investment towards building infrastructure and creating jobs. Ordering activity from large multilateral projects, e.g. high-speed rail, is expected to fuel demand in metro, water and renewables segments. Commodity prices in terms of steel and cement recently witnessed an uptick, and management expects this to normalise and not majorly impact margins. Given the strong balance sheet, cash infusion from Schneider deal, and control on working capital, we maintain ADD on the stock with a revised SoTP-based target price of Rs1,457 (earlier: Rs1,254).

Shares of LARSEN & TOUBRO LTD. was last trading in BSE at Rs.1359.75 as compared to the previous close of Rs. 1361.45. The total number of shares traded during the day was 414813 in over 24493 trades.

The stock hit an intraday high of Rs. 1392.8 and intraday low of 1331.1. The net turnover during the day was Rs. 565091979.

Source: Equity Bulls

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