Larsen & Toubro's Q3FY19 results (Outperformer) - Good quarter

Q3FY19 result highlights

• L&T reported a strong Q3FY19 performance dented only by weak infrastructure segment margins. PAT grew 35.8% yoy on adjusted base to Rs20.4bn (est: Rs18.3bn) led by strong execution and higher other income (Rs6.1bn against expectation of Rs2.9bn).
• Order inflow at Rs422bn, while down 12.3%yoy on a higher base, was sharply above est of Rs300bn led by strong order intake in infrastructure & hydrocarbon segments. Order backlog grew 4.9%yoy to Rs2.8trn, 2.7x TTM revenue (ex-services, development rev). 
• Consolidated revenue grew 24.2%yoy to Rs357bn (est: Rs338bn) with strong growth in Infrastructure (+31.9%), Hydrocarbon (+25.0%), IT services (+28.9%) and Financial services (+23.8%) segments.
• Domestic revenues grew 30.3% yoy to Rs242.8bn and International revenues grew 13%yoy to Rs114.3bn. 
• Infrastructure segment margins declined 240bp yoy to 5.4% due to adverse job mix and Rs4bn cost provisions in some transportation infra projects which are facing execution headwinds.
• EBITDA grew 27.2%yoy to Rs40bn (est: Rs33.4bn) and EBITDA margin grew 30bp yoy to 11.2% (est: 11.4%). EBITDA includes benefit of Rs5.5bn gain on sale of property in the real estate business, offset partly by cost provisions in the infrastructure segment. EBITDA margins were aided strong growth in the services businesses.
• Net working capital levels declined 70bp yoy to 19.5% reflecting the company’s sustained efforts at containing NWC and adding credence to the execution improvement.  
• L&T maintained its FY19 guidance of: i) 10-12% order inflow growth, ii) 12-15% revenue growth and iii) up to 25bp EBITDA margin expansion (ex-services and development business). 

Key positives: Improved domestic execution and domestic inflows.

Key negatives: Lower margins in the infrastructure segment.

Impact on financials: Upgrade of 4.6% in FY19E earnings.

Valuations & view

L&T’s core E&C business performance continues to improve, both in terms of order inflows as well as execution. While the core margins remained weak, they are likely to improve going forward as large projects cross the margin recognition threshold. Working capital levels meanwhile continue to improve despite strong execution. We expect a buoyant 15%/15.2% revenue/EPS CAGR for L&T over FY18-21. On our revised estimates, stock trades at 18.9x/16.4x FY20E/FY21E earnings. We maintain our Outperformer recommendation on the stock with revised SOTP based price target of Rs1527.