Standalone numbers disappoint: For 2QFY2016, Larsen & Toubro (L&T) reported a 4.1% yoy increase in its standalone top-line to Rs13,234cr. The revenue growth was subdued, reflecting revenue de-growth across Metallurgical and Material Handling (MMH) and Heavy Engineering (HE) segments. The EBITDA margin for the quarter is down 290bp yoy to 7.6%, on account of surge in Sales, Administrative and Other (SAO) and operating expenses. On adjusting for the gains from stake sale in a subsidiary, L&T reported an adj. PAT of Rs643cr, down 38.3% yoy. Such de-growth in yoy PAT is partly on account of higher interest expenses.
Order inflows for the consolidated entity declined 24.8% yoy to Rs54,996cr, in 1HFY2016. L&T’s order backlog as of 2QFY2016 end stands at Rs2,44,097cr, thereby giving revenue visibility for over the next 30 months.
Hydrocarbon reports minimal losses: Despite weak execution across the international business, the Hydrocarbon business reported a revenue of Rs1,961cr in 2QFY2016 while the segment’s EBIT level loss was negligible, at Rs2cr, vs a loss of Rs54cr in 2QFY2015. On the whole, this segment ended 1HFY2016 with EBIT level profit of Rs37cr.
Key Positives: Negligible losses from the Hydrocarbon segment (indicating turn-around in sight); positive Management commentary on the award outlook front; favorable net WC cycle at 24% of sales.
Key Negatives: Lowering of order inflow and revenue guidance for FY2016 at the backdrop of lower order inflows and revenue growth in 1HFY2016.
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 Rs1,646. 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 16.6% upside potential in the stock from current levels, we maintain our BUY rating on the stock.

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