IGI Logo

Misses estimates but recovery underway

L&T’s Q1FY22 earnings were below estimates due to lower execution, lower other income and higher credit costs in L&T Finance. PAT at Rs11.7bn (+287% YoY on low base) was below estimate of Rs15.3bn. Revenue grew 38% YoY to Rs293bn, with E&C revenue growing 57% YoY to Rs179bn (estimate: Rs213bn). E&C margin grew 240bp YoY to 8.9% (estimate: 7.9%) was a key positive. Order inflow declined 12.7% YoY to Rs266bn and order backlog grew 6.1% YoY to Rs3.2tn (3.2x TTM E&C revenue). Rise in working capital level (up 60bp QoQ to 22.9%) is seasonal and led by payments to vendors. Collections remained strong at Rs276bn (Rs252bn in Q1FY21). Execution levels continue to recover well after the 2nd wave impact in April and May. The stock trades at 15.5x FY23E E&C EPS of Rs55.1 and at 21x FY23E consolidated EPS of Rs76.2. Maintain ADD with a revised price target of Rs1,735.

Execution below estimate due to Covid second wave; margins remained strong

Execution in Q1FY22 was impacted due to lower labor availability, especially in April/May-21 and supply chain disruption amid Covid second wave. E&C revenue growth was driven by Infrastructure (up 63% YoY), Power (up 103% on a low base) and Others (up 86% YoY). E&C EBITDA margin improvement was led by Infrastructure (up 80bp YoY to 7.1%), Hydrocarbons (up 430bp YoY to 9.6%) and Defence (up 740bp YoY to 20.3%). Margins were supported by favorable job mix, improved overhead recovery, and accounting of claims in the Hydrocarbons segment.

Order inflows muted due to deferment of orders; order prospects buoyant at Rs9tn

Consolidated order inflows at Rs266bn (up 12.7% YoY on a low base) were muted due to delay in order finalizations. E&C order inflow grew 10.7% to Rs151bn in Q1FY22. Order prospects remain buoyant at Rs9tn (Rs9.1tn in Apr-21) driven by Infrastructure (Rs6.4tn) and Hydrocarbons (Rs1.8tn). Mix of domestic order backlog of Rs2.6tn: Centre (9%), States (31%), PSUs (43%), and Private (16%).

Execution/inflow guidance maintained; working towards divestment of power assets

Given the normalcy in labor availability, strong order backlog, and its buoyant prospects, L&T has maintained its revenue and order inflow guidance of low to mid-teen growth for FY22. L&T is confident of keeping E&C margins flat YoY at 10.3% in FY22. The company is in talks with prospective buyers to monetise Uttaranchal and Nabha power plants. Also, L&T is evaluating the option of third-party equity infusion in Hyderabad Metro.

Execution environment remains strong; maintain ADD

Execution levels continue to recover well after the 2nd wave impact in April and May, and are supported by steady collections. Margins have remained resilient, led by productivity gains and completion of loss-making transportation infra orders, offsetting the adverse impact of higher commodity costs (40% of orders are fixed price). The stock trades at 15.5x FY23E E&C EPS of Rs55.1 (CMP adjusted for value of subsidiaries of Rs743/share) and at 21x FY23E consolidated EPS of Rs76.2. We maintain our ADD rating, with a revised price target of Rs1,735. Our price target revision of Rs203 includes increase of Rs132 in value of listed subsidiaries and Rs71 increase in value of the E&C business.

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer