Buy Larsen and Toubro; target of Rs 1659: Bonanza

Bonanza's research report on Larsen and Toubro

Recently, the stock price of Larsen & Toubro Ltd. (L&T) corrected by ~13% from 52-week high of Rs.1,470 despite reporting good set of numbers in the recent quarters.  L&T has planned a 5-year strategic plan ‘Lakshya’ to focuses on doubling sales to Rs.2,000bn by FY21E, improving margins (ex-services) from 10% in FY16 to 11.2% by FY21E along with value unlocking either by listing the asset or by divesting non-core assets. L&T also has plan to improve its RoEs from 12% in FY16 to 18% in FY21E and bringing down working capital from 24% in FY16 to 18% by FY21E. L&T’s efforts to successfully implement of Lakshya are visible in its recent performance on multiple fronts. It has able to successfully bring down net working capital to 20% in Q2FY18 from 24% in FY16 as well as the operating margin (ex-services) has also shown signs of pick up, 10.9% in Q3FY18. In the recent past L&T has unlocked the value by listing of L&T Finance, L&T Infotech and L&T Technology Services. L&T has also divest some of its non-core assets like, L&T cutting tools, EWAC alloys, L&T general insurance, Seawood retails, etc.

Outlook

With well executed 5-year strategic plan ‘Lakshya’, highly diversified order backlog across segments and geographies, plans to simplify business structure and pick-up in private capex cycle supported by government capex, we value L&T at 19.50x FY19E EPS of Rs.85.20 to arrive at target price of Rs.1,659.00, an upside of ~28%.

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