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Execution gradually regaining ground amid recovery

L&T’s adjusted standalone revenues (ex-E&A business) for the quarter degrew 1.3% YoY to | 19619.8 crore vs. our estimate of | 19984.8 crore. On standalone basis, infrastructure segment revenue (contributing ~77%) fell 7.9% to | 15106.8 crore YoY due to job mix and site productivity though execution improved sequentially due to higher work force mobilisation and supply chain normalisation. On a consolidated basis, adjusted revenues from continuing operations fell 1.8% to | 35596.3 crore YoY. During the quarter, standalone EBITDA margins improved 210 bps to 9.5% (vs. our estimates of 8.0%) on a YoY basis led by control on operating expenses, job mix and better performance in others segments. On a consolidated basis, EBITDA margins came in at 10.5% (vs. 11.1% in Q3FY20).

Strong order inflows led by mega orders in infra segment

For Q3FY21, L&T registered strong order inflows at the group level worth | 73233 crore, with strong growth 76% YoY, led by mega EPC orders won in infrastructure segment (~62% of inflows) including high speed rail (HSR), special bridge project, rural water supply scheme (MP), international order in power T&D etc. While international orders for Q3FY21 came in at | 10253 crore contributing 14% to order inflows. L&T’s order backlog at record high of | 331061 crore up 9% YoY with international orders constituting 20% of order backlog.

Improved collections aid working capital, cash flows...

For Q3FY21, the cash flow from operations was robust, strongly supplemented by improvement in collections that came in at ~| 32000 crore for Q3FY21. The CFO was at | 4370 crore for Q3FY21 (vs. | 2770 crore in Q2FY21). CFO for 9MFY21 came in at | 8020 crore. Net working capital to sale ratio was at 26.2% for 9MFY21 (vs. 26.7% in H1FY21) on account of gradual improvement in business activities. It expects to maintain working capital ratio at FY20 levels. As on Q3FY21, debt has increased by | 6900 to | 54000 crore compared to Q4FY20 levels.

Valuation & Outlook

L&T reported strong order inflows while execution is seeing traction amid higher work force mobilisation and supply chain normalisation that could improve over next few months. Also, improved collections would further help improve working capital situation while cash proceeds from E&A have provided much needed liquidity comfort and ability to repay debt further strengthening the balance sheet. We expect it to deliver standalone revenue CAGR of 13.7%, EBITDA CAGR of 13.4% and PAT CAGR of 14.6% in FY21- 23E. We value L&T on SoTP (base business at 20x FY23E EPS of | 49.5) basis with a target price of | 1640 (earlier TP of | 1045). We change our rating from HOLD to BUY.

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