Dec 01, 2016 06:24 PM IST | Source:

Buy Larsen & Toubro; target of Rs 1650: Edelweiss

Edelweiss is bullish on Larsen & Toubro has recommended buy rating on the stock with a target price of Rs 1650 in its research report dated November 22, 2016.

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Edelweis's research report on Larsen & Toubro

Larsen & Toubro’s (L&T) Q2FY17 numbers may appear ordinary as sales and EBITDA came in line and PAT beat was driven by higher other income. But, closer scrutiny reveals that: a) despite 11% order inflow spurt, net working capital improved resulting in cash profit of 2x net income after several years; b) though we agree that infra margins have been weak and critics will argue that oil & gas margins are also driven by provision write-back, the fact remains that L&T pruned employee cost-a huge change as normally Q2 entails large bonus cost; and c) Q2 also saw significant efforts by L&T to unlock value, benefits of which will help the company tide over uncertainties, if any, from demonetisation associated slowdown. Overall, at current juncture risk to L&T’s earnings appears to be far lower than those of discretionary and cement companies. Maintain ‘BUY’ with SOTP based target price of INR 1,650/ share.

While L&T’s net working capital to sales has improved from 23.5% in FY16 to 22% in Q2FY17, management maintains its medium-term target of 17-18% by FY20-21. Also, the company is committed to improving its RoE to 15% over the medium term. While L&T suffers from near-term uncertainties w.r.t. private capex slowdown and potential impact of demonetisation, we believe the growth story over 3-5 years is largely in place with much better earnings quality over the medium term. We maintain ‘BUY/SO’.

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