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

Larsen & Toubro: The Monitorable Troika; Order inflow, domestic execution and working capital key monitorables

(LT IN, Mkt Cap USD23.3b, CMP INR1216, TP INR1540, 26% Upside, Buy)

• With LT’s announced 2Q19 orders at INR340b, we estimate 2Q19 orders at INR475b, +65% YoY and 1H19 orders at INR836b, +51% YoY. FY19E orders are expected up 12% YoY (earlier 10%) at INR1.7t; elections next year should impact 2H19/1Q20 ordering, in our view.
• Domestic engineering and construction (E&C) execution growth has picked up post GST implementation (+15% YoY in FY18) and we expect the momentum to continue in FY19. We build in domestic E&C execution growth of 14%/15% for FY19/20.
• 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 2QFY19 stood at INR340b (INR129b in 2QFY18), driven by Heavy Civil, Buildings and Factories (B&F), Transmission and Distribution (T&D), Hydrocarbons and Water segments. We estimate 2Q19 orders at INR475b (+65% YoY) with FY19 orders at INR1.7t (+12% YoY, 1H19: +51% YoY). Going into general elections in May 2019—we expect ordering to slow down in 2H19/1Q20. Historically, government orders have slowed in the quarter preceding/during the election quarter (See Exhibit 9) as the election code of conduct sets in. We now build in an 11% decline in 2H19 orders driven by: (a) high base in 3Q18 where orders were up 38% YoY to INR481b, and (b) slowdown in ordering in 4Q19 as the election code of conduct sets in.