Dec 01, 2016 06:29 PM IST | Source:

Buy Larsen & Toubro; target of Rs 1634: HDFC Securities

HDFC Securities is bullish on Larsen & Toubro has recommended buy rating on the stock with a target price of Rs 1634 in its research report dated November 23, 2016.

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HDFC Securities' research report on Larsen & Toubro

L&T 2QFY17 results were in line with core EPC revenue growth of 7% YoY and EBIT margins of 5.7% (-50bps YoY). Revenue could have been higher (Rs 8-9 bn) if it was not for some execution challenges faced in the domestic business in 2QFY17. Order inflows stood at Rs 311 bn (+9% YoY) and the mgmt reiterated its 15% growth guidance for FY17E. Working capital (as percentage of sales) improved to 22% (vs. 24% as at FY16 end). While EBITDA grew 8% YoY, lower interest cost (-20% YoY) and higher other income (+50% YoY) led to APAT growth of 41% YoY (ex-gain on insurance stake sale).

L&T has a strong order book (over 2x TTM sales) with negligible slow moving orders. Visibility on new orders is strong led by public sector capex in roads, railways, metros, power T&D and water. High-end residential real estate is only 6% of L&T’s order book, thereby limiting the demonetisation impact. Importantly, one-off provisioning (hydrocarbon and shipbuilding) is done with and working capital has also begun to improve. Losses post commissioning of Hyderabad metro is the only risk to earnings, in our view. Post the recent correction (12% in last one month), we believe the negatives are in the price. Upgrade L&T to BUY with a revised SOTP based TP of Rs 1,634 (20x Sep-18E P/E for core EPC business).

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