MOSL: LARSEN & TOUBRO (Buy)-A robust quarter, orders up 46% YoY

Larsen & Toubro: A robust quarter, orders up 46% YoY

(LT IN, Mkt Cap USD24.6b, CMP INR1297, TP INR1570, 21% Upside, Buy)

• Sales of INR321b (+21% YoY) were ahead of our estimate of INR290b, particularly driven by Hydrocarbon (+38% YoY), Infrastructure (+22% YoY), IT (+32% YoY) and Finance (+35% YoY) segments. EBITDA rose 27% YoY to INR37.8b, with the margin of 11.8% exceeding our estimate of 10.6%. The EBITDA beat can be ascribed to higher E&C margins (8.5% v/s our estimate of 8%), IT/TS and Others segments. Realty (part of ‘Others’ segment) – which typically delivers EBITDA margin of ~40% – improved its sales to INR6b from INR1b in the year-ago period. Adj. PAT of INR20.3b (+20% YoY) was ahead of our estimate of INR16.3b. NWC stood at 19.6% of sales (-110bp YoY). For 1HFY19, sales/EBITDA/PAT grew 20%/34%/29% YoY. For 2HFY19, we expect sales/EBITDA/PAT to grow 10%/10%/17% YoY.
• E&C sales increased 18% YoY (our estimate: +11%) – domestic E&C sales grew by 23% YoY and overseas E&C sales by 8% YoY. Domestic E&C growth was driven by Infrastructure (+28% YoY) and Hydrocarbon (+ 63% YoY) segments; Power segment sales, however, declined by 32% YoY. There is a clear push from the government (central + state) to complete projects ahead of elections, which is evident from the execution pick-up. Growth in overseas E&C sales was driven by Hydrocarbons (+21% YoY) and Heavy Engineering (+113% YoY).
• E&C margin expanded 40bp YoY to 8.5% (our estimate: 8%), primarily driven by Heavy Engineering (incl. Defence) segment (margin up 11.2% YoY to 24.7%). Infrastructure margin shrank 60bp YoY to 6.8%, primarily as some projects did not reach the margin recognition stage.