Larsen & Toubro's Q1FY20 results (Outperformer) - Beat in Order inflow
Q1FY20 result highlights
- L&T reported strong order inflow of Rs387bn, a 11% growth yoy compared to expectations of flat to decline in order inflow during the quarter. As a result, Order backlog grew by 9.4%yoy to Rs2.9trn, 2.7 x book to bill ratio revenues (on trailing twelve month basis ex-services and development business revenues). Note that the Electrical and Automation business is being treated as part of discontinued operations with receipt of CCI conditional approval in Q1FY20.
- Consolidated revenue grew by 10%yoy to Rs297bn (est: Rs299bn) led by growth in Infrastructure (+14%yoy), Heavy Engineering (+163%yoy), IT services (+21.4%yoy) and Financial services (+14%yoy) segments. Domestic revenues grew by 18%yoy to Rs205bn while International revenues witnessed a decline of 5%yoy to Rs92bn.
- Consolidated EBITDA margin came in at 11.2% (vs est of 10.8% and 10.4% in Q1FY19) in Q1FY20. As a result, EBITDA came in at Rs33.2bn (+20% yoy) compared to our est of Rs31bn. Infrastructure segment margins were 6.4% declined by 40bp yoy, Service segment EBITDA declined by 470bps while hydro carbon business margins grew by 60 bps yoy to 7.6%. Note that Q1FY19 EBITDA was lower due to write off Rs7.5bn in realty business offset by Rs6bn gain on sale of assets (Rs3.5bn on Kattupalli port and Rs2.5bn on INVIT)
- Net working capital (NWC) levels increased by 200bp yoy to 23% to fund its vendors amidst tight liquidity situation.
- L&T has maintained its guidance of FY20: 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; CCI approval for sale of Electrical and automation business
Key negatives: Acquisition of Mind Tree; Weak Infra Margins
Impact on financials: Maintain our earnings estimates
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 consolidated earnings estimates, stock trades at 19.4x/16.6x FY20E/FY21E earnings. We maintain our Outperformer recommendation on the stock with revised SOTP based price target of Rs1699 (rolled over to FY21).
Larsen and Toubro is engaged in the following business segments: Engineering & Construction; Electrical & Electronics; Machinery & Industrial Products; and Other. Engineering and construction segment comprises execution of construction projects in civil, mechanical and electrical engineering. Electrical and electronics segment comprises the manufacture and sale of switchgear, petroleum dispensing pumps, and medical equipment. Machinery and industrial products segment comprises the manufacture and sale of industrial machinery and equipment. Other segment includes property and software development, generation of power for consumption by Haldia Petrochemicals Limited, and financial services.
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