Standalone numbers disappoint: For 3QFY2016, Larsen & Toubro (L&T) reported
1.5% yoy decrease in its top-line to Rs14,774cr, reflecting revenue de-growth
across Infrastructure and Others segments. The EBITDA margin for the quarter is
down 368bp yoy to 6.8%, on account of surge in SAO and employee expenses. The
PAT came in at Rs791cr, down 25.3% yoy, reflecting poor operational performance.
Order inflows for the consolidated entity in 9MFY2016 declined 13.2% yoy to
Rs93,524cr. The order backlog stands at Rs2,56,458cr, thereby giving revenue
visibility for over the next 10 quarters.
Hydro-carbon reports minimal losses: Despite completion of legacy projects in
the international business, strong execution of ongoing projects helped the
Hydro-carbon segment report revenues of Rs2,184cr in 3QFY2016. For the
quarter, this segment reported a turnaround in its EBIT to Rs39cr vs a loss of
Rs137cr in 3QFY2015. On the whole, this segment ended 9MFY2016 with an
EBIT level profit of Rs77cr.
Key Positives: Surprise on the order inflow numbers for the quarter, turnaround in
the Hydro-carbon segment; net WC cycle at 24% of sales.
Key Negatives: Lowering of order inflow guidance for FY2016, revenue degrowth
in 3QFY2016.
Outlook and valuation: L&T’s diversified presence and an anticipated recovery in
the capex cycle coupled with the company’s strong balance sheet comfort us that
it is well positioned to benefit from a revival in the award activity environment.
With order backlog expected to grow, execution should pick-up gradually. We
have valued the company using the sum-of-the-parts (SoTP) methodology, to
capture the value of all its businesses and investments. Ascribing separate values
to its parent business (on a P/E basis) and investments in subsidiaries (using P/E,
P/BV and M-cap basis), we arrive at FY2017E based target price of `1,310. We
are of the view that L&T is a good proxy play for investors wanting to ride on the
revival of the Indian infrastructure growth story. Given the 16.7% upside potential
in the stock from the current levels, we maintain our BUY rating on the stock.

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