7 June 2020
4QFY20 Results Update | Sector: Capital Goods
Larsen & Toubro
Estimate change
TP change
Rating change
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CMP: INR955
TP: INR1,120 (+17%)
Buy
Weak E&C performance; order inflows surprise
No easy escape, but trust L&T to navigate these turbulent times
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
LT IN
1,402
1340.9 / 17.3
1592 / 661
5/-11/-25
4821
Financials & Valuations (INR b)
Y/E Mar
2020 2021E
Sales
1,455 1,481
EBITDA
163
161
PAT
89
71
EBITDA (%)
11.2
10.9
EPS (INR)
63.4
50.4
EPS Gr. (%)
10.5
-20.5
BV/Sh. (INR)
475
508
Ratios
Net D/E
1.9
2.0
RoE (%)
13.8
10.2
RoCE (%)
6.0
5.1
Payout (%)
26.5
30.0
Valuations
P/E (x)
15.1
19.0
P/BV (x)
2.0
1.9
EV/EBITDA (x)
18.9
20.1
Div Yield (%)
1.4
1.3
FCF Yield (%)
0.8
-7.2
2022E
1,723
198
95
11.5
67.8
34.5
561
1.9
12.7
5.6
30.0
14.1
1.7
16.9
1.7
-3.5
4QFY20 core operating performance was below expectation as E&C EBITDA
missed our expectation by 16%. Higher other income and lower taxation
cushioned the impact, limiting consolidated adj. PAT decline to 5% in 4QFY20.
As expected, management highlighted various challenges, including working
capital, risk related to labor availability, execution challenges, and
contractual obligations and potential funding requirements in the non-core
business. While macro variables may not be controllable for management,
the focus on working capital over execution is a key positive.
L&T has
navigated these challenges multiple times in the past, and the core E&C
business remains cash generating.
Factoring the macro risks, we cut our core E&C EPS by 16–18% over FY21–
22E. The consolidated EPS cut is limited to 11%/13% in FY21/FY22E as the IT
businesses (LTI, LTTS, and Mindtree) provide some support. We forecast
core E&C revenue/EBITDA/adj. PAT CAGR at 7%/7%/2% as tax rates
normalize once again. Our new TP stands at INR1,120 (prior: INR1,200).
While the near-term outlook may look hazy, L&T remains the best proxy of
the Indian capex story and is likely to further consolidate its market share in
the post-COVID-19 era. Maintain Buy.
4QFY20 consolidated adj. PAT declines 5%:
Consol. revenue was up 2% YoY
to INR442b (in-line). EBITDA de-grew 3% YoY to INR51b (15% miss), with the
margin at 11.6% (-60bp YoY). A disappointing operating performance was
offset by higher other income (+8% on high base), a lower tax rate (22.7%
v/s 24.9% in 4QFY19), and a higher share of JV/associate profits. Thus, adj.
PAT declined 5% to INR30.6b,
broadly in line with our estimates.
For FY20,
consolidated revenue/EBITDA/adj. PAT growth stood at 8%/7%/11%.
FY20 core E&C earnings come in strong at 25% YoY:
4QFY20 core E&C
revenue declined 5%to INR335b as COVID-19-related lockdown impacted
execution, and milestones in many projects were not achieved. On account of
negative operating leverage, EBITDA declined 12% YoY and core E&C margins
came in at 9.8% (-80bps YoY). Adj. PAT for core E&C was down 14% to
INR24b.
For FY20, revenue/EBITDA/adj. PAT for core E&C grew 2%/0%/25%.
Order inflows better than expected:
Order inflows surprised positively,
mitigating concerns related to the ordering environment and slowing
economic growth. For FY20, order inflows grew 9% to INR1.86t, marginally
below the management guidance range of 10–12%, but better than our
estimate of flat growth. International orders grew 33% YoY to INR601b and
formed 32% of the total order inflows. Domestic orders were flat at INR1.3t
and formed 68% of the order book. Core E&C order inflows stood at
INR1.45t (+5% YoY).
Operating leverage missing as COVID-19 impacts milestones
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Mar-20 Dec-19 Mar-19
0.0
0.0
0.0
37.9
37.2
38.2
17.9
19.9
20.3
44.2
42.9
41.5
FII Includes depository receipts
Nilesh Bhaiya – Research Analyst
(Nilesh.Bhaiya@MotilalOswal.com); +91 22 6129 1556
Pratik Singh – Research Analyst
(Pratik.Singh@MotilalOswal.com); +91 22 6129 1543
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.