MOSL: LARSEN & TOUBRO (Buy)-Strong pick-up in domestic infrastructure execution

​Larsen & Toubro: Strong pick-up in domestic infrastructure execution

(LT IN, Mkt Cap USD25.3b, CMP INR1159, TP INR1345, 16% Upside, Buy)

• In-line 1QFY18 operational performance (excluding one-off): LT's 1QFY18 revenue increased 10% YoY to INR238.1b, in line with our estimate of INR237b. EBITDA of INR20.6b (+9% YoY) was 13% below our estimate of INR23.6b; however, adjusting for one-offs (INR1.2b disputed receivables not recognized for Nabha power and INR1b for inventory write-down in shipbuilding), EBIDTA (INR22.8b) was in line with our estimate. Reported PAT grew 46% YoY to INR8.9b, 10% below our estimate of INR9.9b. We highlight a sharp reduction in losses from associates/JVs (loss of INR372m v/s INR1.7b in 1QFY17), driven by improvement in IDPL's road portfolio and surrender of two road projects. NWC stood at 20% of sales v/s 18% in 4QFY17 - the marginal deterioration was due to pick-up in domestic execution.
• E&C execution at 14% YoY; domestic infrastructure grew 18% YoY: E&C sales of INR154b rose 14% YoY. Importantly, domestic infrastructure sales rose 18% YoY (2% in FY17), a five-quarter high, as a few large projects started execution. Note that domestic infra margin is 300bp higher than overseas; however, this did not show up in 1QFY18, as some of the projects have not reached margin threshold limits. E&C margin shrunk 50bp YoY to 7.4% in 1QFY18.
• Cutting order growth estimates: Order intake stood at INR264b (-11% YoY) v/s estimate of INR280b. Order inflow was impacted by a fall in international order inflow (-40% YoY to INR79b; 1QFY17 had the Saudi Aramco INR67b gas field order). Domestic orders grew 12% YoY. To factor in weak orders in 1QFY18, we cut our FY18 order estimates to 11% (earlier 15%), which implies 9MFY18 growth of 17%. Order book stood at INR2.6t (+2% YoY).