Larsen & Toubro's Q4FY18 results (Neutral) - Strong order inflows; no surprises on growth guidance

Q4FY18 result highlights

• L&T’s Q4FY18 results were ahead of estimates led largely by higher EBITDA margin and lower than estimated interest and depreciation charges. PAT grew 4.7%yoy to Rs31.7bn, above estimate of Rs29.6bn.
• Revenue grew 10.5%yoy to Rs407bn, below estimate of Rs427bn, mainly due to lower than estimated infrastructure revenue. EBITDA grew 23%yoy to Rs53.9bn (est: Rs54.2bn) led by 140bp yoy expansion in EBITDA margin to 13.3% (est: 12.7%). The yoy margin expansion was led by higher margins in E&A, IT and financial services (higher credit costs in PY) and gain of Rs4.8bn (rev of Rs6.5bn) on sale of land in Bangalore (included in others). This margin expansion was partly offset by provisioning for disputed receivables of Rs2.2bn in Nabha power and higher receivables provisioning of ~Rs2bn yoy and inventory write-off in shipbuilding. Margins in Infrastructure, Hydrocarbon and Heavy Engineering (HE) and were impacted by adverse job mix and stage of execution.
• Working capital levels declined to 19.2% from 21.5% as on Dec-17.
• Domestic revenue grew 13.4%yoy (8.8%yoy in 9mFY18) led by improved execution in infrastructure and HE. International revenue grew by just 3.8%yoy due to lower order backlog (down 10.5%yoy).
• Order inflow grew 4.8%yoy on a high base to Rs496bn (est: Rs450bn) led by 6.8%yoy growth in domestic infrastructure orders. FY18 order inflow grew 6.9%yoy to Rs1.53 trn. Order backlog remained flat at Rs2.6trn after removal of ~Rs260bn slow-moving orders (mainly from realty; removed ~Rs160bn in Q4FY18) and GST related adjustments.
• FY19 guidance: i) 10-12% order inflow growth, ii) 12-15% revenue growth and iii) upto 25bp EBITDA margin expansion (ex-services and development business). Infrastructure and Hydrocarbons are likely to be the main drivers for order inflows, with an improved share of domestic Hydrocarbon orders. 

Key positives: Strong order inflow & improved domestic execution.

Key negatives: Weak international order backlog/revenue

Impact on financials: Upgrade of 3.9%/4.6% in FY19E/FY20E EPS mainly due to lower depreciation for Hyderabad Metro project.

Valuations & view

L&T continues to witness pockets of improvement in the form of strong domestic order inflows and improved execution in Infrastructure as well as de-leveraging led by improved working capital and asset monetization. While we expect a reasonably buoyant 13% revenue/EPS CAGR for L&T over FY18-20, valuations at 25x/20.8x FY19E/FY20E earnings do not offer margin of safety against risk to earnings from weak execution. As a result we maintain our Neutral rating with revised SOTP based price target of Rs1,439.