Managing efficiently in challenging times
* Q2FY21 numbers were broadly in line with estimates, except the core E&C business, which was slightly short of our expectation. Order inflows stood at Rs280bn, down 42% yoy but in line with our lower expectation.
* Net working capital has risen to 26.7% of sales in H1FY21 due to lower sales rather than absolute NWC increase. L&T targets flat WC levels as of Mar’21 compared to Mar’20, though we would expect lower execution leading to a release of WC.
* L&T announced a special dividend of Rs18/share out of post-tax receipt of ~Rs110bn from E&A business sale. Of the remaining, Rs50bn will be used for debt repayment and Rs20bn will be invested in Hyderabad metro and Financial services business each.
* While bearish on the sector, we prefer L&T for the relative safety, likely market share gains and strong long-term pipeline across water, metro and railways, besides inexpensive valuation (~12x adj. FY22E P/E). Maintain Buy with a revised TP of Rs1,154.
Cut FY21-23E EPS; NWC management so far good but challenges ahead: We cut FY21- 23E EPS by 7-10% as we factor in continued execution and ordering slowdown through the rest of FY21. Moreover, even as labor workforce is less of a challenge now, social distancing norms may still prevent extracting full efficiency from the workforce.
Uncertain order prospects and constrained government finances may lead to continued order deferral. In fact, order and tender activity over the past 18 months has already been weak (still down 15-20% yoy). This means L&T will have to win more order market share at steady or better margins to be able to counter the slowdown.
During 1HFY21, L&T has generated positive OCF of Rs36.5bn vs. negative Rs24.2bn in H1FY20; however, we believe that these are early days and despite management’s best efforts, we remain concerned on the trajectory of the same, especially given the fiscal situation of the Centre and State.
Usage of cash from the sale of E&A business is reasonable, in our view, though we would be watching any further fund requirement for Hyderabad metro and monetization of other noncore assets that management plans, such as – Nabha Power and Singrauli hydro power project.
Maintain Buy on relative safety in the sector and inexpensive valuations: We estimate L&T to deliver a 9.2%/10.3% CAGR in revenue/EBITDA over FY20-23, compared with 7.2%/12.7% over FY17-20. We maintain our Buy rating with a revised TP of Rs1,154. The key downside risks include a further weakening in order flow/execution and NWC pressure
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