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MOSL: LARSEN & TOUBRO (Buy)-Look beyond minor blip; no guidance cut a positive surprise

(LT IN, Mkt Cap USD25.5b, CMP INR1294, TP INR1680, 30% Upside, Buy)

 Execution to bounce back after minor blip in 3QFY20
** L&T’s adj. PAT (excl. E&A business) grew 13.8% to INR21.6b and missed our estimates by 11%. The miss was largely led by disappointment in execution as core E&C revenue declined 2.7% YoY, thereby limiting consolidated revenue growth to 5.9%. Infrastructure segment revenue declined 5% YoY, led by execution hurdles owing to Maharashtra elections, halt in construction activities in NCR region as well as slow moving AP orders.

** L&T surprised by maintaining its order inflow, revenue growth and core margin guidance. Key takeaways: (a) order inflow surprises positively on account of unannounced orders, (b) domestic execution is expected to bounce back as slow-moving orders commence execution and (c) E&A sale is on track to be completed in 4QFY20/1QFY21 – this maintains hopes of one-off special dividend, aiding RoE expansion.

** We largely maintain our consol. earnings estimates. At CMP, the stock trades attractively at FY21/22E P/E of 16.8x/14.1x (adjusted for valuation of the non-core businesses). Maintain Buy with TP of INR1,680.

Headline numbers disappoint on macro concerns, but not alarming
** Consol. revenue was up 5.9% YoY to INR362b (9% miss). EBITDA grew 9.8% YoY to INR41.2b (10% miss) with the margin at 11.4% (+40bp YoY). PBT declined 5% YoY to INR32.2b due to higher deprecation. Tax rate was at 22.1%. Thus, adj. PAT of INR21.6b (+14% YoY) was 10.5% below our estimate.

** The bleak operating performance is largely attributable to the weakness in core E&C segment, where revenue declined 3% YoY to INR254b – first de-growth in 23 quarters. Excluding corporate overheads, the core E&C margin expanded 10bp YoY to 8.9%. Note that the base quarter had INR5.0b positive contribution to EBIDTA on account of lumpy sale of commercial asset. In light of the same, L&T has performed well on the margin front.