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Healthy execution and margin improvement

Larsen & Toubro (L&T) witnessed healthy execution and margins recovery; Exservices revenues grew 57% YoY to Rs182bn with 310bps YoY higher EBIT margins at 7.1% during Q1FY22. Impact of the pandemic was limited to delay in order finalisation and this is expected to normalise from H2FY22 onwards. Hyderabad Metro operations continue to be under stress with loss of Rs4.7bn in Q1FY22.

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 Rs9trn and the management maintains guidance of low to mid teens growth in revenues and order inflow with stable margins during FY22. Given the focus on margins and asset sales, we maintain BUY on the stock with a revised SoTP-based target price of Rs1,857 (earlier: Rs1,760).

* Healthy recovery of ex-services segment: Despite the impact of covid second wave, the infrastructure segment saw healthy execution. We expect this trend to continue and gradually gather pace during H2FY22E. Improvement in execution in Q1FY22 led to higher margins aided by operational leverage.

* Healthy growth outlook and government thrust: L&T expects the pandemic situation to normalise by H2FY22-end and the government to be able to execute the expenditure portion of the Budget, thereby boosting overall GDP. Total order prospects of Rs9trn lend growth visibility, of which Rs6.4trn is led by infrastructure followed by Rs1.8trn from hydrocarbons. Visibility on ordering from Middle East and Africa has improved.

* Cash burn at Hyderabad Metro to continue: Low ridership at Hyderabad Metro is continuing to impact overall cashflows as L&T and the company booked loss of Rs4.7bn in Q1FY22. L&T is trying to refinance the debt with better terms to reduce the overall interest outgo.

* Working capital stable; support to suppliers continues: Collections have improved and the current ‘net working capital to sales’ ratio is at 22%. Management continues to provide support to the suppliers given the pandemic scenario. Net working capital is expected to be at similarlevels in FY22.

* Maintain BUY on strong balance sheet and focus on asset sales: We believe both state and Central governments will start focusing on investment towards infrastructure and job creation 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. Recovery from the global markets and revival of hydrocarbon segment is expected provide further fillip to overall growth. 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 Rs1,857 (earlier: Rs1,760).

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