Infrastructure and engineering major Larsen & Toubro (L&T) reported decent performance in March quarter despite challenges due to nationwide lockdown with order inflow growing 5 percent YoY to Rs 57,785 crore. Total orderbook is now at Rs 3.03 lakh crore thereby providing strong revenue visibility going forward.
Hydrocarbon, IT and financial services segment helped the company to report 2.2 percent year-on-year growth in revenue at Rs 44,245.28 crore, while profit dropped 6.5 percent YoY to Rs 3,197 crore due to tepid revenue growth, weak operating performance and higher interest cost, though lower tax cost limited bottomline decline.
Infrastructure segment, which constituted over 73 percent of total orderbook and 58 percent to total revenue, registered a 5.7 percent fall in revenue, primarily led by slowdown due to COVID-19 environment. Operating profit declined 3 percent and margin contracted 62 basis points YoY due to weak execution.
Majority of brokerages are bullish on L&T given its leadership position in the infrastructure segment, strong orderbook and healthy balance sheet, though the company could face challenges due to COVID-19 in the first half of FY21. In fact they expect stock to return 14-26 percent potential upside from current levels.
"We expect L&T to face near-term challenges on account of pandemic and working capital stress but believe them to bounce back owing to multiple levers like strong business model, diversified order book and healthy balance sheet. The company continues to focus on its strategic plan of improving their return ratios," said Prabhudas Lilladher which maintained its buy rating on the stock with a revised SOTP based target of Rs 1,192, implying 25 percent potential upside.
Going ahead, management indicated segments like heavy civil, power transmission and water to see good traction for order inflows. While management expects segments like hydrocarbon, buildings and transportation to gradually pick up by Q2/Q3FY21 and construction equipment segment to pick up by second half of FY21.
L&T has prudently withheld guidance on FY21 on inflows or execution, given the current operating uncertainty.
Dolat Capital also expects execution disruptions to continue in first half of FY21, mainly due to labour challenges, before it picks momentum in H2. As a result, the brokerage trimmed its FY21 and FY22 estimates.
But L&T is keeping an eagle eye on cash and working capital in a tough execution phase, said the brokerage, adding L&T remains the best play for the recovery in the capex cycle.
Dolat Capital believes L&T's size, diversity and balance sheet will be key competitive advantages. Current valuations are very supportive, hence the brokerage maintained buy call with a SOTP based target of Rs 1,200, implying 26 percent potential upside.
Despite a weak outlook on revenue and margins in FY21, Motilal Oswal said they did not see free cash flow for the core engineering and construction business turning negative from hereon as it expects the company to choose working capital management above revenue growth. "However, there may be funding risk for non-core businesses such as L&T Finance Holdings or Hyderabad Metro."
L&T's results suggest a tough macro environment for the construction industry and likely survival challenges for debt-ridden companies, but Motilal Oswal expects L&T to emerge stronger in the post-COVID-19 era and further consolidate its market share in the Indian Construction industry.
On account of earnings estimates cut, the brokerage cut its price target to Rs 1,120 (prior: Rs 1,200), implying 17 percent potential upside. "While the near-term outlook may look hazy, L&T remains the best proxy of the Indian capex story," said Motilal Oswal while maintaining buy call.
Despite the near-term headwinds, Emkay also believes that L&T is well-placed to emerge stronger from the slowdown as it has historically gained market share during a crisis.
Hence, the brokerage maintained buy rating on the stock with a revised target of Rs 1,103 (Rs 1,127 earlier), implying 15.5 percent potential upside.
Among brokerages, ICICI Direct is the only research firm which downgraded L&T to hold from buy rating, and valued L&T on SoTP (with base business at 16.5x FY22E EPS) with a revised target price of Rs 1,090, implying 14 percent potential upside.
"L&T reported decent order inflows, which provides strong revenue visibility for two to three years. However, execution challenges amid COVID-19 could have some impact in the near term. Also, preservation of working capital levels would be closely monitored to maintain comfort on balance sheet front. L&T is expected to deliver standalone revenue CAGR of 1.2 percent and EBITDA CAGR of 9.4 percent in FY20-22," the brokerage reasoned.
Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
