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Focus on margins and asset liquidation

Larsen & Toubro (L&T) witnessed healthy execution and margins recovery, especially in the infrastructure segment. Advent of covid second wave has brought uncertainty on growth and order intake fronts in the near term; however, L&T expects the situation to normalise Q2FY22-end onwards. Hyderabad Metro operations continue to be under stress and the company has set aside ~Rs20bn as support for the same in FY22.

Working capital is stable and L&T continues to provide support to its suppliers given the continuing liquidity challenges. Order pipeline for FY22 stands at Rs9.6trn and the management guides for low to mid teens growth in revenues and order inflow with stable margins during FY22. Factoring-in near-term headwinds, we cut consolidated earnings by 14%/6% for FY22E/FY23E. Given the focus towards margins and asset sales, we maintain BUY with a revised SoTP-based target price of Rs1,670 (earlier: Rs1,684).

* Return of pandemic has reshuffled some of the migrant workers: Covid second wave has put a spanner in the works, which had reached pre-covid levels of activity. Assuming lockdown-related risks, some of the migrant workers have moved back home. However, due to the spread of pandemic equally to rural hinterlands, the exodus has been limited and the company is ensuring care and proper hygiene, etc. to limit any major movement as was witnessed in FY21.

* Healthy growth outlook and government thrust:

Government is trying to minimise economic damage from the second wave by not opting for a complete pan-India lockdown. L&T expects the pandemic situation to normalise by Q2FY22-end and that the government will be able to execute the expenditure portion of the Budget, thereby boosting overall GDP. Company foresees Rs9.6trn overall order prospects, of which Rs6.56trn is domestic led by infrastructure followed by hydrocarbon.

* Cash burn at Hyderabad Metro to continue:

Low ridership at Hyderabad Metro is continuing to impact overall cashflows as L&T has reserved a further Rs20bn for FY22E towards the same. It is in negotiations toward restructuring or sake sale, but will be careful not to sell at a discount given the long-term value accretion from this asset. For FY20, the metro operations reported a net loss of ~Rs17bn due to low volumes.

* Working capital stable; support to suppliers continues:

Q4FY21 saw improvement in cash from operations and the management has guided towards YoY flat net working capital for FY22. Collections have improved and advances from customers have increased; however, given the liquidity scenario, L&T continues to support its suppliers.

* Maintain BUY on strong balance sheet and focus on asset sales:

We believe both state and Central governments will start focusing on investment towards building infrastructure and creating jobs post normalisation of the pandemic situation. The focus on asset sales, especially Nabha Power and Hyderabad Metro, will boost cashflows in the medium to long term. Given the strong balance sheet, control on working capital and expected recovery of growth in H2FY22E, we maintain BUY on the stock with a revised SoTP-based target price of Rs1,670 (earlier: Rs1,684).

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