Larsen & Toubro is India’s largest E&C company with interest in projects, Infrastructure development, manufacturing, hydrocarbon, defense, IT & financial services.
L&T’s Q1 FY20 sales grew 10 percent YoY. Its EBITDA margin expanded 100bps to 11.2 percent. Adjusted PAT grew 21 percent YoY to Rs 13.6 billion. Despite sluggish capex investment, order inflows grew 11 percent YoY to Rs 387 billion. Working capital deteriorated 200bps largely helping vendor liquidity.
We believe that the forthcoming capex in select private sectors and in the Railways will lead to healthy inflows for the company. Adjusting for its discontinued operations, we reduce our FY20e and FY21e earnings respectively 4 percent and 6 percent.
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As per management, domestic pipeline in FY20 will be ~Rs 8,400 billion. Infra Rs 5400 bilion, generation Rs 500 billion, T&D Rs 1,000 billion, hydrocarbons Rs 1,200 billion, etc. comprise most of the domestic pipeline. The FY20 international pipeline will be ~ Rs 1,650 billion. In domestic infra, L&T enjoys a ~20-25 percent market share.
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Internationally, it has ~10-15 percent. This would lead to ~10-12 percent growth in order inflows of ~ Rs 1900 billion-2,000 billion, in line with management guidance. In Q1, order inflows grew 11 percent YoY to Rs 387 billion (international 23 percent). The order book has grown 9 percent YoY to Rs 2,940 billion (international 21 percent).
On the robust order book, we expect the company to achieve its ~ 12-15 percent sales growth guidance. We have adjusted our sales estimate for the discontinued operations in electrical & automation. Excl. the services business, margins likely to sustain. In infra, a pick-up in execution is expected to lead to margin improvement. Further, hydrocarbons and power are expected to show margin improvement in the core business.
With a strong book, we believe that sales growth will be healthy and margins are likely to sustain or improve from current levels. Further, monetisation of non-core assets will help the company release capital and improve return ratios.
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