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  • Stock recommendation: Larsen & Toubro Ltd – BUY – TP Rs.1520

    Publish Date: 26th July, 2018

    Result Update:

    L&T reported all round good numbers which exceeded our estimates on all fronts including Revenue, EBITDA, PAT and order intake front. The company has started the fiscal well, which should help it to meet its overall profit and order intake guidances.

    Key Highlights

    • The company reported 19% growth in revenue. EBITDA grew at a faster pace aided by modest margin expansion. Consequently, PAT grew at a strong pace in Q1FY19.
    • Order intake during the quarter rose 37% y-o-y to Rs 361 bn and order book stands at Rs 2.7 trn (up marginally). Ordering has been driven by government entities. Private sector capex (including real estate) still remains muted though there are nascent signs of investments taking place in metal industry.
    • The company booked profit on sale of 1) Kattupalli port - Rs 3.5 bn and 2) divestment of stake in Invit - Rs 4.0 bn. This was offset by provisions the company made on a dispute with a realty company. The matter is subjudice but the company provided Rs 7.35 bn towards this and is part of the Operating expenses.
    • There was a change in accounting policy from April 2018, as per which the company had to provide for Expected Credit Loss (ECL) on contracts in progress. However, the net effect was marginal due to writebacks in some business divisions.
    • The company also changed the policy on recognition of realty income from "Percentage of Completion" method to full completion method, which led to booking of higher realty income than would have been the case otherwise.

    Valuation & outlook

    On forward earnings basis, L&T is trading at 21.6x and 18.9x FY19E and FY20E consolidated earnings respectively. Valuations have eased in recent quarters given factors like slippage in order intake and weakening macro-economic factors. We believe that valuations are now reasonable, thus prompting us to move the rating a notch higher. We maintain our target price of Rs 1520 (unchanged) on the stock, valuing it at 21x FY20 earnings. Due to adequate upside, we upgrade rating to "BUY".


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