AnandRathi
The strong international orders growth (64 percent y/y) led Larsen & Toubro (L&T) to report a 2 percent y/y order inflows of 42 bn. Revenue was a miss, rising only 6 percent y/y to 362bn due to hydrocarbon (16 percent y/y) and services (63 percent y/y).
The EBITDA margin came flat at 11.4 percent. PAT grew 15 percent y/y to 23.5bn. Working capital was a high 23.5 percent. Management talked of an opportunity pipeline of 3 trillion for Q4 FY20. Considering the strong prospects and robust order backlog of 3 trillion, we maintain a buy, with a revised target of 1,761 (a sum-of-parts valuation, based on FY22e).
While the economic environment is subdued, management talked of prospects of 3 trillion for Q4 FY20.
Internationally, sectors such as power T&D, water, metro rail and hydrocarbons would contribute to growth. This would lead to ~10-12 percent growth in order inflows of ~ Rs 1,900bn-2,000 bn, in line with management guidance. In nine months, order inflows grew 11 percent y/y to Rs 1,286 bn (international 34 percent). The order book has grown 9 percent y/y to 3,063bn.
Despite the lower-than-expected revenue growth in Q3, management retained its 12-15 percent growth guidance as a few large projects from Andhra Pradesh, the Mumbai Coastal Road project and NCR will start contributing to revenue from Q4 FY20. In infra, a pick-up in execution is expected to lead to expanded margins. Further, margins in hydrocarbons and power are expected to improve in the core business due to the strong order backlog.
With a strong book, we believe that sales growth will be healthy and margins are likely to hold or improve. Further, monetisation of non-core assets will help the company release capital and improve return ratios. We maintain a buy.
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