Pick Of the Week – Larsen & Toubro
We hereby present you our investment idea for Equity Investment i.e “Pick of the Week”. A thorough analysis of company, industry and economy goes behind our stock ideas for you. With the “Pick of the Week”, you may earn superior returns in stock market over a time horizon of 6 – 9 months.
INVESTING RATIONALE
• Robust & diversified Order Book: FY19 order inflow grew 15.6% yoy and order book stood at Rs 2,93,427 crore as of March 31,
2019. Order Inflow during Q4FY19 was Rs 56,538 crore, up 14% YoY led by the strong growth of 72% YoY in International orders.
The order book of infrastructure segment stood at Rs 2,21,850 crore. Robust bid pipeline for FY20 provides visibility for continued
traction in order inflows.
• Strong Execution: Revenues in FY19 have clocked in at Rs 141,007 crore registering a resurgent growth of 18% over FY18. PAT
touched an all-time high of Rs 8,905 crore in FY19 representing a substantial growth of 21% over FY18. Margins stood at 12.5%
against 13.3 % in the year-ago period and were dragged down by decline in Infra segment margins to 8.5%. Infrastructure margin
was impacted due to increase in commodity prices, job mix and one time provisions. We expect margins to normalize led by signs
of capex revival in H2FY20. L&T has maintained its revenue growth and order inflow guidance at 12-15% and 10-12% for FY20.
• Healthy financial with improving RoE: For FY19 consolidated net cash flow from operations was at Rs 9130 crore. Net working
capital improved by 200 bps to 18% YoY while RoE improved 120 bps to 15.2%, YoY. Borrowings (ex-services) were up by Rs 1800
crore during FY19. Company is continuously moving away from the non-core and lower margin business to increase revenue
contribution of high margin Services (IT and Finance) business.
• Government thrust on Infrastructure: Govt. announced significant push in infra and sub-sectors including roads, railways, port,
airports, and urban infrastructure. The capex outlook for these segments remain strong for the next 3-5 years. With 16% market
share in the last five years, L&T has been able to maintain leadership position in the infra space. Apart from infra, Hydrocarbon
order inflows in FY19 has been strong and therefore expected to show major contribution in FY20 and FY21.
• We maintain a BUY with a target of Rs. 1,553
WE RECOMMEND
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CMP
Rs.1,412
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Target Price
Rs.1,553
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Potential Upside
10%
* Note: Stock Investment horizon Approx. 6-9 months. CMP as on 19th July, 2019.