Buy Larsen and Toubro; target of Rs 1580: JM Financial
JM Financial’s research report on Larsen and Toubro
L&T delivered 34% growth YoY in 2QFY18 consolidated net profits, driven by a) EBITDA margins expanding to 9.74% (adj for one-offs) vs. 9.2% last year and b) 6% revenue growth that was muted by GST issues. Order inflows (OI) fell 8% YoY to INR 287bn, although its order book (OB) at INR 2.6trn (+2% YoY) remains healthy at c.3x FY17 sales. Management has cut its FY18 OI guidance to flattish/marginal growth vs. 10%-12% earlier, given the spill-over of large Indian infra/defence orders into FY19. However management maintained guidance of 12% revenue growth and 25bps YoY margin improvement. L&T’s order basket for FY18-FY19 remains strong with INR 3trn from Indian infra/T&D projects and INR 300bn-400bn in hydrocarbons.
However, much of this may spill over into FY19, given the delays in awarding. With its OB at c.3x FY17 sales, execution growth and margin expansion are key for EPS growth, where L&T maintains its guidance. Lower inflows in FY18 would imply higher inflows in FY19-FY20 due to the spill-over of large projects such as the Trans-Harbour link (L&T is L1 in 2 packages), Mumbai coastal road, Navi Mumbai airport, defence orders, etc. We maintain BUY, on the stock given 16%-17% earnings CAGR in FY18-20E and inexpensive valuations (21x FY20 EPS) with a revised TP of INR1580.
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