MOSL: LARSEN & TOUBRO (Buy)-Strong revival in domestic E&C execution

Larsen & Toubro: Strong revival in domestic E&C execution

(LT IN, Mkt Cap USD28.6b, CMP INR1378, TP INR1650, 20% Upside, Buy)

• L&T's 4QFY18 revenue increased 11% YoY to INR407b, in line with our estimate of INR412b. Adj. EBITDA of INR51.3b (+17% YoY), too, was in line with our estimate (Exhibit 1). Reported EBITDA of INR54b (+22% YoY) includes (a) profit of INR4.8b on sale of land in Bangalore and (b) INR2.2b of provision on Nabha Power receivables. Core E&C segment margin shrank 60bp YoY to 12.3%, led by contraction in the margin in Hydrocarbons (6.1%, -370bp YoY) and Heavy Engineering (18.1%, -950bp YoY), as projects did not reach the margin recognition threshold. Adj. PAT of INR31b was ahead of our estimate of INR27.3b (see Exhibit 2). NWC fell to 19.5% of sales in 4QFY18 (21.5% in 3QFY18), despite strong domestic execution, which entails higher working capital. For FY18, sales stood at INR1.2t (+10% YoY), EBITDA at INR136b (+22% YoY) and PAT at INR73b (+22% YoY).
• Domestic E&C growth at 19% YoY, with infra up 25% YoY: E&C sales growth stood at 15% in 4QFY18, with domestic E&C growth at 19% (driven by 25% YoY growth in infrastructure and 27% YoY in heavy engineering) and overseas growth at 6%. Growth revived across the infrastructure vertical (ex B&F) with the GST impact subsiding and execution improving.
• FY19 order guidance builds in impact of elections: For FY19, the company guided for order growth of '+10-12% YoY', sales growth of '+12-14% YoY' and margin improvement of 25bp YoY to 10.8% (ex-services). We build in 10% growth in orders, 12% growth in sales and 30bp improvement in margins (ex-services). 4QFY18 orders stood at INR496b (+5% YoY, 80% domestic), driven by the infrastructure segment. Order book stood at INR2.63t (+1% YoY) as orders worth INR160b were removed from the order book in 4QFY18; these primarily relate to the B&F and transport infrastructure segments.