Published on 25/07/2019 9:34:12 AM | Source: Prabhudas Lilladher Ltd

Buy Larsen & Toubro Ltd For Target Rs.1,744 - Prabhudas Lilladher

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Increasing focus on digitization

L&T FY19 Annual report suggests investments in domestic market are set to revive from 2HFY20 onwards and all segments are expected to deliver a promising growth. Internationally, thrust is towards Middle East geography mainly in Renewable energies, Hydrocarbon expansion and Non-oil revenue whereas significant infrastructure investments drive the non-Middle East geographies. The company is on track to achieve its 5-year plan (RoE improved from 12.5% in FY17 to 15.3% in FY19) and remains confident on achieving its goal (RoE 18%) by FY21. Further, L&T is developing its next strategic idea (to launch by FY22) and has already announced aggressive plans on digitalization (L&TNxT) across products and project business. The company has guided a revenue growth of 12-15%, EBITDA margin (ex-services) of 10.5% and expects similar numbers in FY21E. We maintain BUY with revised SOTP based TP of Rs1744 per share.


Positive commentary for FY20:

Over the last couple of years, several large projects in the areas of Roads, Urban Transportation (Airports and Metro), Water supply, Irrigation, Hydrocarbon etc were announced. However, many projects are struck due to rising debt levels, liquidity crunch, policy uncertainties, resulting muted incremental capex. The general elections at the end of FY19 also led to slowdown in awarding of new contract. L&T management expect investment climate to revive from 2HFY20 onwards as the new government settles down.


Increasing focus on digitalization to improve productivity:

As part of Lakshya plan, L&T has identified ‘Digitalization’ as a key initiative. The Company has levered on ongoing digitalization efforts, operational efficiencies, reducing working capital levels, unlocking business values, forays into new geographies, innovating business, inorganic growth and continuing ROE enhancement.


Other key points:

* L&T has entered into a share purchase agreement (18th March 2019) with Coffee Day Trading Limited and Coffee Day Enterprises Limited (‘Sellers’) for acquisition of 3,33,60,229 equity shares of Mindtree Limited aggregating to 20.32% of the paid-up equity share capital of Mindtree Ltd.

* CCI approved divestment in Electrical & Automation business (subject to certain conditions),

* Investments in subsidiaries/JVs declined 12% YoY at Rs201bn, Hyderabad metro final CoD expected by July 2020,

* L&T Shipbuilding continued to bleed (with a loss of Rs4.4bn in FY19),

* L&T Realty had written down value of investment and created provision of Rs8.4bn, etc. 


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