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Maintain BUY on Larsen & Toubro - Marginal miss, bracing for recovery - HDFC Securities

Posted On: 2021-01-27 09:04:55 (Time Zone: Arizona, USA)

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities

LT reported revenue at Rs 356bn, marginally shy of pre-COVID level (-2% YoY) and our estimates (-3%). Margin expansion and higher other income led to 4.5% YoY growth in APAT. Large order wins helped the company clock highest ever quarterly order inflow of Rs 732bn, taking order book to record Rs 3.31tn. Strong cash collection kept working capital in check. With near normal operational recovery, focus has now shifted to monetization of concessional assets, which would be an uphill task in the current environment, in our view. We maintain BUY on LT, given its (1) strong order book (Rs 3.31tn, ~3x FY20 core EPC revenue), (2) healthy balance sheet and (3) robust services business. We increase our FY21 estimate by 16% to account for higher other income and revise target price to Rs 1,657/sh (Rs 1,602 earlier).

Near normal execution recovery: LT reported revenue at Rs 356bn (-2%/15% YoY/QoQ), marginal miss on our estimates. While services business remained resilient with IT & TS growing by 7% YoY and finance declining by 4% YoY, core business faced productivity headwinds, declining 5% YoY. Lower PLF at Nabha Power and continued challenges at Hyderabad Metro led to 34% YoY decline in revenue from developmental segment. EBITDA grew by 4% on margin expansion. Higher than expected other income (supported by gains in treasury operations) and lower finance cost led to 14% beat on APAT. With highest ever order book and recovery in productivity, LT aims to repeat FY20 nos. However, we remain cautious and factor 6% and 27% de-growth in revenue and APAT respectively.

Order inflow grows by 76% YoY; OB at Rs 3.31tn: Total order inflow came in at Rs 732bn, (below our estimate of Rs 818bn, seems LOA timing difference). With strong domestic ordering and large order wins in infra., (high speed rail from NHSRCL) and hydrocarbon (from an HPCL JV and ONGC), LT reported 107% YoY growth in ex-services order inflow. Order book now stands at Rs 3.31tn, providing three years of revenue visibility for EPC business. The order pipeline for 4QFY21 stands at Rs 2.7tn (domestic Rs 2.2tn and international at Rs 0.5tn). Continuous focus on infrastructure by the Government, uptick in economic indicators, push for self-reliance for defense requirement and rebound in crude oil prices augurs well for LT.

Balance sheet remains comfortable: Net debt remained stable at Rs 1tn (vs Rs 1tn on Sep. 20-end). Cash remained at elevated level (Rs 450bn) as the company looks to support developmental business (mainly Hyderabad Metro, Rs 5bn infused in the quarter) and finance business. This seems to be peak debt with likely reduction over next 2-3qtrs. While the NWC as a % of sales remains elevated at 26.2% due to lower denominator, robust customer collection helped generate Rs 40bn FCFF during the quarter.

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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