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Emkay Global
L&T (Buy)
CMP: ₹1,276.9
Target: ₹1,559
Over the past year, the Government (Centre and the States) has seen a worsening of fiscal stress, driving a slowdown in public infra capex. As per the September 2019 RBI study on State finances, FY20E State infra spend will fall by 4.5 per cent compared with about 16 per cent CAGR over FY16-19 (not assuming further worsening since the presentation of the State budgets).
While we have argued in the past that a distributed public capex funding model led by Centre, States, municipalities and multi-lateral agencies alike provides cushion against such expansion in the fiscal deficit, we now believe that a near-term continuation of slowdown in order inflows is inevitable as slowing economy has further added to the pain.
Our monthly infra tracker suggests that tenders are still down 41 per cent YTD FY20 as of Nov19, indicating that order activity will likely remain low for H2FY20. Thus, despite a strong order inflow momentum in H1FY20 for L&T, we foresee a potential for lowering the guidance in Q3FY20 to 8-10 per cent growth from the current 10-12 per cent growth in order inflows.
We cut FY21/22E EPS by 4 per cent to factor in near-term concerns on order inflows. Despite the infra order weakness, strong hydrocarbon order backlog will support growth until FY21, in our view.
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