Prabhudas Lilladher is bullish on Larsen and Toubro has recommended buy rating on the stock with a target price of Rs 1800 in its research report dated October 23, 2019.
Prabhudas Lilladher's research report on Larsen and Toubro
L&T reported strong set of numbers for 2QFY20 which were higher than our estimates. The company consolidated Mindtree numbers (Rs19 bn revenue) during the quarter. Revenue for the quarter was up 15% YoY at Rs353 bn (PLe Rs351 bn) led by Infrastructure, Hydrocarbon and IT&TS businesses. Despite weak environment, L&T maintained order inflow momentum with 20% YoY growth at Rs483 bn in 2QFY20 (H1FY20 +16% YoY at Rs870bn), led by Power (+74% YoY), Hydro Carbon (+441% YoY) and Services business (+33% YoY). However, growth in order inflow was mainly led by international market (+116% YoY) as domestic market witnessed decline of 3.7% YoY. Gross margin improved 350bps YoY which was partially neutralized by higher employee cost and other expenses. Hence, EBITDA margin was flat YoY at 11.4%. Absolute EBITDA grew 14% YoY at Rs40 bn. While other income increased by 46% YoY, Depreciation and Interest rose 32% and 72% YoY, respectively. Eff. Tax rate came in at 24% (PLe 27%). Recurring PAT was 24% YoY at Rs25.3 bn (PLe Rs21 bn). NWC (as percentage of sales) increased by 340bps YoY at 23% due to delay in payments release by central & State governments and support to vendor chain. RoE at the end of 2QFY20 came in at 15.8% compared to 15.4% in 1QFY20. The company indicated of opportunity pipeline of Rs5.2 trn and maintained order inflow/revenue growth/EBITDA margin (ex-services) guidance at 10-12%/12-15%/10-10.5% for FY20. The company continues to focus on its strategic plan of achieving profitable growth and improving RoE to 18% by FY21.
We maintain our BUY recommendation on L&T on the back of its strong business model with robust order book, diverse skill sets, strong execution capabilities and increased focus on improving return ratios by exiting non-core assets. We maintain BUY with revised SOTP based TP of Rs1800 (Rs1767) on account of addition of Mindtree valuation.
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