EUR 120.00 For Business Accounts Only

MOSL: LARSEN & TOUBRO (Buy)-Bracing for macro headwinds-Cut FY20/21 core EPC estimate by 1.5%/3.4

(LT IN, Mkt Cap USD25.2b, CMP INR1277, TP INR1680, 32% Upside, Buy)

** Order inflow assumption trimmed on account of macro risks: We have revisited our order inflow assumption to factor in risks of capex cuts and the likely delay in order awarding from the Maharashtra government post the change of government in the state. L&T's sensitivity to the cut in Central government capex is quite limited as it forms just ~20% of the order book, with limited contribution from roads, railways and defense. Our overall order inflow assumption stands at 9.6%/10.8% for FY20/FY21 with core E&C order inflow growth estimated at 5.2%/8.8%. 2HFY20 ask rate for core E&C is at 2.2%.

** Minor near-term hiccups in execution may not be ruled out: Despite the economic slowdown and the general elections, L&T's core E&C domestic business has witnessed growth of 16% in 1HFY20. However, we recall that ~INR160b worth orders pertaining to Andhra Pradesh and the Mumbai Coastal Road project are slow-moving currently. Additionally, we suspect near-term slowdown in construction activity in Maharashtra state owing to state elections and delay in formation of a new government. Due to lower order inflow assumption and near-term risks to execution, we lower our FY19-21E revenue CAGR to 12.4% from 14.1% earlier. 2HFY20 ask rate for core E&C is at 12.8%.

** But, L&T is better off navigating concerns compared to peers: Thanks to L&T's well-diversified business across verticals as well as geographies, it is in a better position to overcome macro challenges compared to mid-cap EPC companies dependent on any single segment or geography. For instance, post the formation of a new government in Andhra Pradesh, uncertainty around the choice of the capital city had a negative impact on NCC (not rated), while the impact on L&T was quite limited.