Larsen & Toubro's Q3FY20 results (Outperformer) - Order inflow surprises positively; Guidance maintained

Q3FY20 result highlights

• L&T has maintained the order inflow guidance for FY20E on back of strong order inflow growth of 11% yoy in 9mFY20. The order inflow for Q3FY20 came in at Rs416bn, +2% yoy growth - a huge positive given the challenging macro, low order expectations and deferral of orders by clients.
• L&T will need to win Rs660bn (excluding Services revenue) worth of orders in Q4FY20 to meet the lower end guidance of Rs1.95trn, Order opportunity basket for L&T in Q4 is Rs3.0 trn (Rs2.5 trn of domestic opportunities and Rs0.5 trn of international orders). We have done a granular analysis (Exhibit 2) of order basket in following pages to arrive at a Rs3.1trn opportunity for L&T.
• Overall, order backlog as on Q3FY20 grew by 9%yoy to Rs3.0trn. As a result, book to bill ratio came in at healthy 2.9x (ex-services and development business revenue of Rs109bn).
• Q3FY20 consolidated revenue was Rs362bn (vs est of Rs393bn), a growth of 6% yoy due to   delay in execution of some slow moving orders in Infrastructure segment. Management expects resolution of these slow moving orders to accelerate revenue booking from Q4 onwards. As a result, it has maintained the revenue guidance for FY20.
• Consolidated EBITDA margin came in at 11.4% (vs estimate of 10.6%), +40bps higher than Q3FY19. As a result, EBITDA grew by 10% yoy to Rs41.2bn (vs estimate of Rs44bn). Adjusted profit was Rs21.6bn, a growth of 14% yoy. Reported profit (including E&A business) was Rs23.5bn (vs est of Rs23bn), a growth of 15% yoy
• Guidance of FY20E maintained: i) 10-12% order inflow growth, ii) 12-15% revenue growth & iii) EBITDA margin at 10.5% (ex-services and dev. business). 

Key positives:  Strong order inflow amidst weak ordering activity

Key negatives: Decline in infrastructure revenues by 5%

Impact on financials: Revised our earnings estimate downwards by 2%/4% in FY20E/FY21E to account for weak revenues in Infrastructure segment.

Valuations & view

L&T’s core E&C business performance continued to improve in terms of order inflows however execution was slightly weak due to specific issues in few of the orders.  We expect L&T to meet the guidance in terms of order inflow and revenues on account of large ordering pipeline and resolution of specific issues affecting the execution. Working capital levels have deteriorated, but are likely to improve on back of strong growth and improving macro environment. We expect a strong 13%/15% revenue/EPS CAGR for L&T over FY19-21E. On our consolidated earnings estimates, stock trades at 19x/16x FY20E/FY21E. We maintain Outperformer rating on the stock with SOTP price target of Rs1,775.