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Emkay Global
Larsen & Toubro (Buy)
CMP: ₹857
Target: ₹1,127
Despite our and Street worries on order inflow during the Covid-19 lockdown phase, L&T has already announced order inflows of about ₹46,000 crore for Q4FY20 in its core E&C business. Together with the Service business, overall orders for the quarter will exceed ₹57,000 crore (its highest ever), up 4 per cent y-o-y versus our earlier estimate of a 35 per cent decline.
The order backlog for L&T, as of FY20-end, is thus likely to be at ₹3.23-lakh crore, up 10 per cent y-o-y versus our earlier estimate of ₹3-lakh crore, up 3 per cent y-o-y. We had earlier factored in a sharp slowdown in government-driven infra capex spend in FY21-22, owing to the worsening fiscal stress.
While we maintain a bearish order inflow stance, we factor in the positive surprise on order inflow so far, and accordingly, raise our FY22E EBITDA by 4 per cent. Our FY21/22E EPS, however, is negatively impacted on higher borrowing due to higher working capital stress following management commentary that Q4FY20 billing was impacted by about ₹12,000 crore.
We maintain ‘Buy’ rating, with a revised SoTP-based TP of ₹1,127 (₹1,055 earlier). At current valuations of 10.2x FY22E P/E, L&T offers an attractive risk-reward profile, in our view, despite the near-term pain.
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