MOSL: LARSEN & TOUBRO (Buy)-The Monitorable Troika-Order inflow, domestic execution and working capital are key

LARSEN & TOUBRO: The Monitorable Troika; Order inflow, domestic execution and working capital are key

(LT IN, Mkt Cap USD29.2b, CMP INR1360, TP INR1650, 21% Upside, Buy)

• Larsen & Toubro (LT) is on track to meet its guidance of zero-to-marginal growth in FY18 orders. We expect orders of INR462b (flat YoY) in 4QFY18 and build in a 5%/10%/14% growth in LT's order inflows for FY18/ FY19/ FY20. General elections in May 2019 will impact orders in 4QFY19/1QFY20.
• Domestic E&C execution growth has picked up post GST implementation (up 14% YoY in 3QFY18) and we expect the momentum to continue in 4QFY18. We build in domestic E&C execution growth of 12%/15% for FY19/20, as the GST impact tapers off and execution picks up.
• As LT increasingly focuses on its 'Lakshya' strategic plan, NWC should stabilize at 20% of sales after bottoming out in 4QFY17 (18%).

 Focus on the Troika – orders, execution and NWC puts LT in good stead

• Orders: Orders announced in 4QFY18 stood at INR304b (INR334b in 4QFY17), supported by B&F, T&D, Hydrocarbons, Water and Railways segments. We estimate 4QFY18 orders at INR462b (flat YoY), with FY18 orders at INR1.5t (+5% YoY). With general elections scheduled for May 2019, we expect ordering to slow down in 4QFY19/1QFY20; government orders usually slow down in the quarter preceding/during the election quarter, as the election code of conduct sets in. We now build in a 10% growth in orders in FY19 (earlier expectation of 15% growth). However, some advancement of orders into 2Q/3QFY19 cannot be ruled out either, which may pose an upside risk to our order estimates.