Standalone numbers impress: For 4QFY2016, Larsen & Toubro (L&T) reported
an 11% yoy increase in the top-line to Rs21,061cr, which is slightly lower than
our expectation. Revenue growth on a yoy basis reflects an 11.7%/ 33.3%
increase in Infrastructure/ Power segment. EBITDA for the quarter came in
higher than our expectation at Rs3,193cr. With some of the projects attaining
revenue recognition threshold level, EBITDA margins expanded 203bp yoy to
15.2%. This is the first quarter after three successive quarters where the
company reported yoy increase in its EBITDA margin. Further, the PAT at
Rs2,539cr has come in ahead of our estimate. On adjusting for gains on
divestment of stake in the Foundry business (Rs48.5cr) and provision for
impairment on the value of investment (Rs135cr), Adjusted PAT stood at
Rs2,616cr. Adj. PAT margin improved 254bps yoy to 12.4% in 4QFY2016.
Order inflows for consolidated entity in FY2016 declined 9.0% yoy to Rs43,334cr.
The order backlog stands at Rs2,49,949cr, thereby giving revenue visibility for
over the next 10 quarters.
Hydro-carbon business reports minimal losses: With completion of legacy
projects in the international business, strong execution from ongoing projects
helped the Hydro-carbon segment report 10.9% yoy increase in revenues to
Rs2,479cr. For the quarter, the segment reported an EBIT level loss of Rs92cr vs a
loss of Rs209cr in the corresponding quarter a year ago.
Key positives: More clarity on ongoing asset divestments, IDPL restructuring,
completion of Hydro-carbon legacy projects; net WC cycle at 24% of sales.
Key Negatives: Miss on FY2016 order inflow guidance.
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 Rs1,700. 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 15.3% upside potential
in the stock from the current levels, we upgrade to BUY rating on the stock.

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