MOSL: LARSEN & TOUBRO (Buy)-Focus on complex jobs with high design content-Domestic execution to pick up in 2HFY18

Larsen & Toubro: Focus on complex jobs with high design content; Domestic execution to pick up in 2HFY18 as GST impact tapers off

(LT IN, Mkt Cap USD26.5b, CMP INR1215, TP INR1440, 19% Upside, Buy)

We recently met management of Larsen and Toubro (LT). Key takeaways:
Order inflows – focus on complex jobs with high design content

• LT is focused on orders with higher design element and more technical complexities, rather than the run-of-the-mill ‘road’ jobs, where competition is intense and margins are thin.
• 1HFY18 saw large orders being delayed/deferred. Although some revival is expected in 3QFY18 (announced orders stand at INR240b till date v/s INR120-130b in 1Q/2QFY18), slippages may continue into FY19.
• Roads: LT will bid only under the EPC and not HAM mode. It remains to be seen how the private sector is able to arrange funds for the INR5.4trn Bharat Mala program (Phase 1), which has significant portion of work under the HAM mode.
• Defence: a) Landing Platform Docks: LT is hopeful that the order for the Landing Platform Dock will be placed in 2H18; it is competing with Reliance Defence on this order. b) Towed guns: Competing with Kalyani Group for this order worth INR150-160b; the order is delayed as the MOD is yet to decide whether to go with this or competing guns from DRDO and OFBs (Dhanush), or the upgraded BOFORS guns. c) The strategic partnership model has been kick-started for submarines; LT expects orders in FY19/20.
• Rail electrification: This is a huge opportunity as the Indian Railways is looking at electrifying ~38,000km in five years. Orders are to be placed for 400-1,500km packages on an EPC basis; LT, KEC and Kalpataru Power are the key beneficiaries.
• Water: LT continues to see strong traction from states in this segment; IN140b of annual orders from water for LT in FY17.