MOSL: LARSEN & TOUBRO (Buy)-FY19 orders to be driven by Water, Heavy Civil and Hydrocarbon

LARSEN & TOUBRO: FY19 orders to be driven by Water, Heavy Civil and Hydrocarbon; Domestic execution pick-up to drive sales

(LT IN, Mkt Cap USD25.1b, CMP INR1235, TP INR1540, 25% Upside, Buy)

We recently met Larsen & Toubro’s (LT) management. Key takeaways:

Water, Heavy Civil and Hydrocarbons to drive orders in FY19

• Order prospects for FY19 stand at INR6.2t (up 11% YoY; refer Exhibit 1 for details), with a lower share of large-sized orders compared to the previous year. The company maintained its FY19 order growth guidance of ‘+10-12% YoY’ – Water, Heavy Civil and Hydrocarbon segments are expected to be the key growth drivers.
• Segment-wise, 15% growth is targeted in the Infrastructure segment (ex T&D) in FY19, with orders in the T&D vertical estimated to be flat YoY. In the current fiscal, order growth in the Transportation Infra and Building & Factories (including Smart World) segment is expected to be lower than Water and Heavy Civil segment.

 Segment-wise order prospects for FY19

• Heavy Civil Infrastructure: Total order prospects in this segment stand at INR900b – metros, special bridges and Hydel power projects are likely to be the key drivers. Orders from Nuclear Power Corporation of India (NPCIL) are expected to revive only in FY20, with NPCIL planning to add 7GW of capacity worth ~INR0.9-1t. LT can address 80% of this opportunity, with the civil portion accounting for ~25% of the total.
• Water: LT continues witnessing strong traction in this segment with order prospects of INR700b in FY19. Orders are being placed by state and municipalities for lift irrigation, sewerage pipelines, water and effluent treatment plants.
• T&D: Orders are estimated to be flat YoY in FY19 (equally split between domestic and overseas); order prospects stand at INR950b. LT has been able to diversify into states, making up for the slowdown in PGCIL orders. The center’s push toward village/household electrification (SOUBHAGYA scheme) has also been instrumental in driving orders in the power distribution vertical for LT in FY18. The trend is likely to continue in FY19 as well.