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Strong inflows a positive surprise

* LT reported a PAT of Rs17.2bn, in line with our estimate. EBITDAM stood at 11.5% vs. est. of 11.4%. Core projects and manufacturing margin came in at 9.2% vs. 8.1% a year ago. H1FY22 margin was ahead of H1FY21. LT maintained its full-year margin guidance.

* Order inflow (ex-services) at ~Rs301bn came in as a positive surprise. This was led by high value international orders won in the Hydrocarbon division (~Rs1.2tn ordering prospects for H2FY22). Domestic awards have been lagging, though tendering activity has seen healthy momentum. Overall order prospects are up 12% YoY to Rs6.83tn.

* Execution was calibrated to match cash flows. NWC at ~22% of sales has improved from ~27% last year. Customer collections too have improved to Rs322bn (up ~9% yoy).

* We raise our Dec’22 TP to Rs2,200 from Rs2,000, as we raise our value for IT subs and roll forward the valuation to Dec’22 from Sept’22. IT and Finance subsidiaries now form Rs960/share in our SoTP. Maintain Buy.

International order wins in Hydrocarbon drive strong inflows (ex-services): The Hydrocarbon segment reported record-high order inflows (2-year high) during the quarter at ~Rs145bn, on the back of a high-value order won in the international market. Peak crude oil prices (~$83/bbl in Oct’21 - up 2x yoy) is creating fresh investment capacity in certain economies, leading to high ordering prospects for H2FY22 as well (~Rs1.2tn; 80% international). High onshore activity in the business drove 20% yoy revenue growth as well, with stable margins.

Domestic awarding sluggish, but visible project pipeline paints a colorful picture: Although awarding activity has come down (22% yoy) due to the pandemic impact and slower disbursals from the central govt., tendering activity remains stronger than ever, with the overall business pipeline for H2FY22 at Rs6.83tn (up ~12% yoy). Management is confident of achieving pre-Covid level execution in the near term, driven by healthy labor force availability (250k - up from 240k last year), reliable domestic supply-chain (cautious on international), and assuming no third wave of Covid.

Core EBITDAM expansion positive in a challenging environment; maintains annual margin guidance: Despite commodity inflation, better overhead costs recovery and various measures, such digital initiatives, value engineering and process optimization, altogether drove core EBITDAM improvement of ~110bps to 9.2% yoy. These benefits are expected to accrue going ahead as well. LT has maintained its stated guidance of delivering FY21 core EBITDAM of 10.3% for full-year FY22.

Maintain Buy: We raise our TP to Rs2,200, as we increase value from IT subs and roll forward to Dec'22. IT and Finance subsidiaries now contribute Rs960/share in our SoTP. We maintain FY22/FY23/FY24E EPS and the multiple for the core business. Key risks include 3rd Covid wave, and any further slowdown in tendering & awarding activity.

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