Larsen & Toubro's Q4FY19 results (Outperformer) - Order accretion strong in an uncertain environment

Q4FY19 result highlights

• L&T reported a mixed Q4FY19 with a strong order inflow albeit slightly below our estimates. In addition, the margin in infrastructure segment was weak during the quarter. Order inflow at Rs565bn +14% yoy for Q4FY19 although below our estimate of Rs630bn and Rs1.7tn, +16% yoy for FY19. As a result, Order backlog grew by 11%yoy to Rs2.9trn, 2.7x FY19 revenues (ex-services and development business revenues).
• Consolidated revenue grew in line at 10.5%yoy to Rs449bn (est: Rs447bn) led by growth in Infrastructure (+11.3%yoy), Hydrocarbon (+21.5%yoy), IT services (+21.4%yoy) and Financial services (+16.9%yoy) segments. FY19 revenue grew by 15%yoy to Rs1.4trn (in line with our estimates).Domestic revenues grew 9.4%yoy to Rs316bn while International revenues grew 13%yoy to Rs134bn. 
• Consolidated EBITDA margin came in a at 12.5% (vs est of 13.4%) for FY19 resulting in EBITDA of Rs56bn below our est of Rs59bn. EBITDA for the quarter was impared by cost provisions in the infrastructure segment. Infrastructure segment margins declined 110bp yoy to 12.3% (130bps lower yoy) for Q4FY19 due to cost provisions in some transportation infra projects which are facing higher costs. PAT grew by 8%yoy to Rs34.2bn (est: Rs34.6bn) led by higher other income (Rs6.1bn against expectation of Rs4bn).
• Net working capital (NWC) levels declined 200bp yoy to 18% reflecting sustained efforts at increasing capital efficiency.  
• FY20 guidance: i) 10-12% order inflow growth, ii) 12-15% revenue growth and iii) EBITDA margin at 10.5% (ex-services and development business). 

Key positives:  Strong order inflow for FY19 and FY20 guidance; CCI approval for sale of Electrical and automation business

Key negatives: Acquisition of Mind Tree; Weak Infra Margins

Impact on financials: FY20E earnings downgraded by 2%

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  strong 14%/13% revenue/EPS CAGR for L&T over FY19-21E. On our revised estimates, stock trades at 20.4x/17.3x FY20E/FY21E earnings. We maintain our Outperformer recommendation on the stock with revised SOTP based price target of Rs1499.