MOSL: Larsen & Toubro (Buy)-The Monitorable Troika-Order inflows I Domestic E&C execution I Net working capital
​Larsen & Toubro: The Monitorable Troika; Order inflows I Domestic E&C execution I Net working capital
(LT IN, Mkt Cap USD24.5b, CMP INR1709, TP INR1970, 15% Upside, Buy)
- ​FY18 would witness a bunching up of large domestic projects in Infrastructure, Defense and Hydrocarbons; we build in 17% growth in orders for LT.
- Domestic execution should pick up in 2HFY18, driven by strong order flow in 4QFY17. NWC at 21% of sales in 3QFY17 is on track to reach 18% by FY21.
- We maintain our Buy rating, with a revised target price of INR1,970 (24x FY19E standalone EPS + INR420/share for subsidiaries).
Focus on orders, execution and working capital for FY18
- ​Orders: We expect LT to meet its order inflow guidance of INR1.5t for FY17 (10% growth), given the strong inflows in 4QFY17. We estimate order intake for 4QFY17 at INR550b (up 27% YoY) – announced orders of INR334b, unannounced orders of INR120b-150b, and services orders of ~INR60b relating to IT&TS, Finance, E&A, etc. Order inflow in 4QFY17 has been supported by finalization of large orders (INR15b+) in the Hydrocarbons and Defense segments. In FY18, we expect strong growth of 17%, driven by bunching up of orders in the Infrastructure, Hydrocarbons and Defense segments.
- E&C execution: E&C execution was weak in 9MFY17 (up 9% YoY), impacted by slowdown in the execution of domestic projects (up 5% YoY). Domestic projects were impacted by delays in customer approval and LT also faced payment deferrals from customers. We expect gradual improvement in execution and 6% YoY growth in 4QFY17. For FY18, we expect 15% revenue growth, led by pick-up in execution of large domestic orders that LT has bagged over the past two years.
- Working capital: LT has reduced its net working capital (NWC) from 25% of sales at the end of FY16 to 21% in 3QFY17, and targets 18% by FY21. As the pickup in domestic execution gains traction in 2HFY18, we expect NWC as a percentage of sales to reduce.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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