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Buy Larsen & Toubro, target Rs 1,760: Reliance Securities


Reliance Securities has a buy call on Larsen & Toubro (L&T) with a target price of Rs 1,760.

The current market price of Larsen & Toubro is Rs 1,417.50.

Time period given by the brokerage is one year when Larsen & Toubro price can reach the defined target.

Investment rationale by the brokerage
Healthy order book: Current order book stands at Rs 2,815 bn (2.3x of FY18 revenue). Order prospects remain healthy in FY19 at Rs 4 trillion led by infrastructure orders of nearly Rs 2000 bn, Power T&D nearly Rs950bn, MMH nearly Rs 15 bn, hydrocarbon nearly Rs 800 bn, and Heavy Engineering & Defense Rs 100 bn. GoI is planning to spend Rs 7 trillion in next 5 years to develop 83,677km of roads including Bharatmala (Rs 5.4 trln). L&T has reported strong 42 per cent growth in order inflow during H1 FY19 at Rs 780 bn; while the management has maintained its FY19 order inflow guidance at 10 per cent-12 per cent implying inflow to decline by nearly 10 per cent in H2 FY19 due to general elections. We expect order inflow to grow at a CAGR of 12 per cent during FY18-21. With India expected to invest significantly in infrastructure creation over the next few years, the company like L&T is in a sweet spot.

Earning momentum to sustain: We expect execution rate to stabilise led by incremental order inflows. We expect L&Ts EBITDA margin to expand to 11.8 per cent in 21E from 11.3 per cent in FY18, as various early-stage projects in which progress is below the required level to recognize EBITDA margin would reach their respective thresholds. We expect ROE to improve to 16.2 per cent in FY21 from 13.2 per cent in FY18 led by execution pick up and margin expansion. Strong cash flow led by stable working capital, lower equity commitment for developmental assets and monetisation of non-core assets augur well for L&T.

Divestment of Non-core Assets: In May18, L&T announced the sale of its E&A business to Schneider Electric for an all-cash consideration of Rs 140 bn. During the last few years, the Company has monetised its investments in several asset-heavy businesses and JVs. It sold loss-making (loss of Rs 1 bn) general insurance business, sold stakes in IT and tech services by IPO. Further, the Company is in the final stage to sell its Kattupalli port.

Outlook & valuation: We are positive on L&T led by strong execution in core E&C business with robust order inflow momentum led by strong performance of key segments i.e. Infrastructure and Hydrocarbon. The plan to exit part of development assets especially monetisation of Hyderabad metro in a long-term is positive, in our view. We expect its revenue and earnings to clock 13 per cent and 16 per cent CAGR, respectively over FY18-21E. At CMP, the stock trades at 19.9xFY20E and 17.1xFY21E earnings. We initiate coverage on the stock with BUY recommendation and an SOTP-based Target Price of Rs 1,760.

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