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

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

(LT IN, Mkt Cap USD29.2b, CMP INR1323, TP INR1540, 16% Upside, Buy)

• Larsen & Toubro (LT) appears to be on track to meet its guidance of zero-to-marginal growth in FY18 orders, given the significant pick-up in 3QFY18 orders (announced orders at INR373b). We estimate 5% growth in LT's FY18 order inflow, implying a 4QFY18 run-rate of INR480b (+2% YoY).
• We note that domestic E&C execution growth had slowed down to 5% in 2QFY18 (v/s 15% in 1QFY18, 10% in 1HFY18), led by GST transition-related disruption. We, however, build in domestic E&C execution growth of 10%/12% for FY18/19, as the GST impact tapes off and execution picks up.
• 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: Post a weak 1HFY18 (when orders declined 9% YoY to INR551b; E&C orders fell 19% YoY), we expect strong order inflow growth in 3QFY18 (up 35% YoY to INR470b; 9MFY18 order inflow up 7% YoY to INR1.02t). Orders announced in 3QFY18 stood at a robust INR373b (INR70b in 3QFY17), led by the B&F, Roads, T&D, hydrocarbons, water and power generation segments. Our FY18 order growth estimate of 5% to INR1.5t implies a 4QFY18 run-rate of +2%, which we believe is achievable, given the good pipeline of large-ticket orders that are yet to be finalized in the domestic infrastructure and defense segments (refer Exhibit 10 for the domestic pipeline). Historically, large orders (>INR15b) inflow have been ~INR200b annually; for 9MFY18, LT has bagged large orders of INR345b.
• E&C execution: Post a strong 1QFY18 where domestic E&C execution grew 15%, execution slowed down in 2QFY18 to 5% due to GST transition-related hurdles. However, we expect domestic execution to pick up from 3QFY18 as the impact of GST subsides, and then pick up further in 4QFY18. For FY18, we expect revenue growth of 8% (10-12% guidance), driven by a revival in execution of large domestic orders that LT has bagged over the past two years. We build in domestic E&C growth of 10%/12% for FY18/FY19.