L&T: RECENT ORDERS ADD STRENGTH

Steady pick-up in domestic order execution and stable West Asia business provide confidence

Larsen & Toubro (L&T), which continues to gain on the bourses, scaled its 52-week high on Wednesday, and at ~1,227 levels is pretty close to its all-time high of ~1,248. While prospects across its businesses are seen improving gradually, receipt of new orders has been the latest trigger. And, if analysts are to be believed, there could be more gains in the counter of India’s largest construction and engineering major.

Among recent orders, L&T’s construction business won contracts worth ~2,525 crore last week, while the company also announced securing orders worth ~1,700 crore from Kuwaiti Oil Company on Wednesday. The company is also being said to be L1 (lowest) bidder for one of the sections of the ~18,000crore Mumbai Trans Harbour (MTHL) contract.

All these developments have increased the Street’s confidence, and analysts at Credit Suisse say that L&T being L1 bidder in MHTL combined with the ground-breaking ceremony for the bullet train and movement on several other large opportunities suggests ordering visibility has improved. The Mumbai-Ahmedabad bullet train project will also create EPC (engineering, procurement and construction) opportunities. Typical requirement of having a Japanese consortium in the lead for such projects narrows the competition and benefits L&T, believes Credit Suisse.

Expected uptick in momentum across domestic infrastructure verticals is also helping. Traction in railways and metro projects, power transmission and distribution (T&D), irrigation and water, smart cities, airports and ports, hydrocarbons and defence is driving this confidence.

This comes as a respite for L&T at a time when capital goods sector is seeing weak sentiments with subdued uptick seen in private capex. The latest order flows should also help meet order inflow targets for FY18, which had remained subdued in June quarter when order inflow at ~26,400 crore was down 11 per cent year-onyear. Since then, L&T has announced inflows worth more than ~8,000 crore and for FY18 analysts now see around 6 per cent rise in order inflows.

Though many other segments are yet to see an uptick, the Infrastructure segment is driving prospects. In the June quarter, L&T’s Infrastructure segment (45 per cent of sales) had also clocked 16 per cent year-on-year increase in sales helped by better order execution. This coupled with good growth (19 per cent) in hydrocarbons, IT and financial services led to a 10 per cent growth in consolidated revenue.

The construction segment, moving forward, should continue to benefit from the digitalisation of operations across the value-chain should help L&T reduce operating costs by 2-3 per cent in the medium term, say analysts.

In the international arena, too, prospects are stable. The latest contract bagged by L&T, valued around ~1,700 crore to build crude oil pipeline from KOC, Kuwait provides confidence on West Asia business. L&T’s projects in the Middle East remain on track and are unaffected by the swings in oil prices over the past year, which is a positive and should allay street concerns. While L&T’s hydrocarbon business had clocked 12 per cent year-on-year revenue growth and its operating profit catapulted to ~508 crore in FY17 (from loss of ~95 crore in FY16), it has done well in June quarter too. Its focus in West Asia is on social infrastructure projects like roads, metro rail, T&D and stadiums, says analysts at Motilal Oswal Securities, and hence, is relatively less impacted by the decline in oil prices over the past year.

While some segments are marking growth, the manufacturing businesses (like shipyard, power boiler-turbine-generator or BTG, and forgings) also offer interesting growth avenues but any significant gains are likely only over the longer term.

L&T’s focus also lies on working capital improvement and lowering cost, operating efficiencies and divesting noncore businesses. Among the several key divestments that are being talked about include commercial real estate in Seawoods, infrastructure investment trust for road assets and sale of the electrical business. Electrical business realisation can be to the tune of ~14,000-16,000 crore, say analysts at Credit-Suisse. Such a large transaction could also pare debt meaningfully.

Overall, although challenges persist, looking at the boost from some segments, analysts as those at Motilal Oswal Securities have a Buy rating on the L&T stock with a sum-ofthe-parts-based price target of ~1,380. Credit Suisse, too, has given outperform ratings with target of ~1,425 based on valuation of 19x PE and 12x Enterprise value/EBITDA assuming FY19 estimates for consolidated EPC business. Investors with a long-term horizon may consider the stock on declines.