Credit Suisse
L&T (Outperform)
Target: ₹1,800
CMP: ₹1471.45
L&T has achieved FY21 inflows of ₹1.75 lakh crore with EPC of ₹1.33 lakh crore and services of ₹42,100 crore. EPC has declined just 12 per cent from ₹1.50 lakh crore in FY20. Breadth in terms of sectors, clients and geographies provide a safety net. Strong inflows with lower execution has boosted visibility to 3 from 2.8x (FY17-19 avg.). Execution can catch up as restrictions reduce.
Meaningful inflow surprise possible in FY22/FY23 on states, private and ME: All three segments declined substantially in FY21. Bounce back in FY22/23 is likely driven by: ordering revival in states (order wins of just ₹24,500 crore vs. ₹44,100 crore avg in FY18-20); oil price recovery in Middle East (just ₹16,000 crore vs ₹28,900 crore avg in FY18-20); and cyclical pick up in private sector (just ₹8,400 crore vs ₹16,900 crore avg in FY18-20).
L&T reported strong operating cash flow of ₹18,100 crore in FY21 driven by absolute Wcap release (₹5,250 crore). Working capital can decline further in % terms, while staying stable in absolute, driving strong cash flows.
Core EPC has barely re-rated despite cyclical and public capex improvement and has traded below current absolute Mcap, only during early 2016 (commodity deflation) and Covid time. Raise target price to ₹1,800 from ₹1,750 on sub valuation.
Published on June 2, 2021
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