Order inflows, strong operating margins to aid L&T's FY17 growth

Moneycontrol BureauGoldman Sachs on Thursday reiterated its ‘buy’ rating on Larsen & Toubro with a target price of Rs 1,725 on expectations of strong order growth and better operating margins.L&T, which has guided for a 15 percent plus rise in order inflows in FY17, will be supported by heavy engineering, defense and power orders. “However, infrastructure (62 percent of FY16 order-flow) is likely grow at a modest 3 percent as strong domestic orders partially offset the drop in international orders,” Goldman Sachs says in a report.The brokerage house expects strong operating margins to improve L&T’s return on capital employed (ROCE) to 9.7 percent in FY17 from 8.8 percent in FY16. ROCE will improve 70 basis points on sale of Katuppali port and its insurance business. "In addition, our analysis indicates the potential sale of Nabha power could further improve RoCE to 12 percent,” the report says. Capacity utlisation and cuts in cost in hydrocarbon and metals will add to 50 bps to L&T’s margins.  However, Goldman Sachs expects company’s infrastructure margins to soften to 10.8 percent in FY17 from 11.7 percent in the previous fiscal year due to lower margins from Middle East orders.In FY17, possible risks for L&T comes from overleveraged infrastructure and real estate companies as well as possible delays in execution of orders could impact the growth in FY17.