MOSL: LARSEN & TOUBRO (Buy)-Domestic execution witnesses strong revival; orders up 38% YoY

Larsen & Toubro: Domestic execution witnesses strong revival; orders up 38% YoY

(LT IN, Mkt Cap USD30.5b, CMP INR1425, TP INR1650, 15% Upside, Buy)

• 3QFY18 revenue increased 10% YoY to INR288b, in line with our estimate of INR290b. EBITDA rose 26% YoY to INR31.4b, with the margin at 10.9% (+130bp) versus our estimate of 10.4%. Core E&C segment margin stood at 8% (-10bp YoY) due to a higher share of infrastructure projects not reaching the margin recognition threshold. PAT of INR15b (+55% YoY) was ahead of our estimate of INR14.3b. Note that the INR2.9b provision for dues from cases referred to the Insolvency and Bankruptcy Board was accounted for as exceptional item and set off against INR2.7b profit on sale of EWAC Alloys. NWC rose to 21.5% of sales in 3QFY18 from 20% in 2QFY18/3QFY17, primarily due to: a) higher domestic execution and b) slowdown in payments for overseas jobs, which resulted in negligible operating cash flow during the quarter (v/s INR33b in 3QFY17).
• Domestic E&C growth at 14% YoY; infra up 21% YoY: E&C sales grew 11% YoY, with growth in the domestic E&C segment at 14% YoY and in the overseas segment at 5% YoY. Domestic E&C growth was driven by the infrastructure (+21% YoY) and heavy engineering (+61% YoY) verticals. A revival in growth was seen across the infrastructure vertical (ex B&F) led by subsiding GST pain and improving execution.
• ‘Flat to marginal’ order inflow growth guidance maintained: 3QFY18 orders at INR481b (+38% YoY, 82% domestic) were up 8% YTD, driven by the infrastructure and hydrocarbons verticals. Order book grew 5% YoY to INR2.7t: slow moving orders of INR40-50b were removed. The company maintained its FY18 guidance of sales growth of 12% (implies 20% growth in 4QFY18) and margin improvement of 25bp YoY (9MFY18: +45bp YoY).