MOSL: LARSEN & TOUBRO (Buy)-The Monitorable Troika-Focus shifts to orders, domestic execution and working capital

​LARSEN & TOUBRO: The Monitorable Troika; Focus shifts to orders, domestic execution and working capital

(LT IN, Mkt Cap USD24.8b, CMP INR1143, TP INR1400, 23% Upside, Buy)

• Meeting FY18 order guidance (12-14% growth; MOSLe: 12% growth) is dependent on finalization of large-ticket domestic projects in Infrastructure and Defense. Post a subdued 1HFY18, the dependency on 2HFY18 would be high.
  
• Domestic E&C execution grew 15% YoY in 1QFY18 – GST woes are likely to slow down growth during 2Q-3QFY18. We build in 10%/15% growth in FY18/19.
  
• Working capital is likely to expand post a bottom in 4QFY17 to 18% (20% in 1QFY18) – pick-up in domestic execution and GST would be the key reasons, in our view.
  

Focus on orders, domestic execution and working capital

• Orders: Post a weak 1QFY18, when orders declined 11% YoY to INR264b (E&C orders down 21% YoY), we expect a subdued 2QFY18, with orders at INR310b (flat YoY; E&C flat YoY). Orders announced during 2QFY18 stood at INR120b (INR180b in 2QFY17), with a fall witnessed across B&F, Roads, T&D, Water and Power Generation segments. Our FY18 order estimate of 12% growth (12-14% growth guidance) implies 25% growth in 2HFY18 and is contingent on finalization of large ticket projects in domestic Infrastructure and Defense (See Exhibit 10 for domestic projects pipeline). Base orders in the domestic E&C segment have historically been in the INR500b-550b range and large orders need to revert to INR400b-500b (INR112b in 1HFY18) for LT to revert to a 10-15% growth trajectory (see Exhibit 2). LT is already L1 in two packages in the Mumbai Metro Phase-4 (~INR12b) and is likely to win one package (of the two packages opened) in the Mumbai Trans Harbor link.