Larsen & Toubro. L&T: Engineered for success

As a play on the domestic infrastructure theme, led by government spending on key projects, and a revival in capex in segments such as hydrocarbons due to the rise in crude oil prices, engineering conglomerate Larsen & Toubro (L&T) is in a favourable spot.

Even though capital investments from the private sector are yet to revive in a big way in India, the Government has increased spending significantly on infrastructure projects in several areas, including on roads, ports, metros, irrigation projects and power transmission. Given its entrenched presence in all these areas and proven execution capabilities, L&T is well-placed to benefit from contract awards in all these segments.

Steady inflow of contracts, especially in the infrastructure segment, a solid order book and a favourable mix of domestic and international revenue are key positives for the company.

Additionally, three of its listed subsidiaries — L&T Finance Holdings, L&T Infotech and L&T Technology Services — have delivered robust performances over the past few years and continue to have a healthy outlook.

At ₹1,242, the stock trades at 18 times its likely per share earnings for FY20. This is lower than the three-year average price-earnings multiple of 22.

Investors with a two-three year horizon can consider buying the stock.

In FY18, L&T’s consolidated revenue increased by 9 per cent over 2016-17 to ₹1.19 lakh crore, while net profits rose by 22 per cent over the same period to ₹7,370 crore. The first quarter results indicate that the company continues to be on a strong revival path, with revenue increasing 19 per cent Y-o-Y to ₹28,300 crore, while net profits improved by 36 per cent to ₹1,200 crore.

Gains from Infra push

The company was set on the revival path in FY18 after overcoming the challenges posed by demonetisation and GST. L&T had an order inflow of ₹1.53 lakh crore in 2017-18, a 6.9 per cent growth over the previous fiscal.

The company’s order book stood at ₹2.63 lakh crore as of March 2018. It rose further to ₹2.72 lakh crore by June 2018, which is 2.3 times its FY18 revenues, thus giving it substantial visibility.

Large projects such as the Hyderabad metro rail facility and the Kannur airport have been commissioned in FY18. It also continues to witness traction in the construction of high-rise office buildings and factories.

L&T continues to win contracts to commission mass transit systems in India and abroad. The company has also won EPC (engineering, procurement and construction) contracts from the Railways in the Eastern Dedicated Freight Corridor project.

The company is focused on EPC projects as far as road construction goes, though most of the contracts awarded by the NHAI are in the hybrid annuity model mode.

L&T also has a healthy geographic mix, with nearly 33 per cent of its revenue coming from international locations. West Asian countries dominate the international revenue streams though.

The company’s hydrocarbon segment, which accounts for over 10 per cent of the order book and caters to the oil and gas industry globally, has witnessed a healthy revival in demand, thanks to the spike in crude oil prices over the last one year and the resultant increase in capex from players in the space.

The Defence segment, where government orders were slow to come by, has witnessed greater traction over the past few quarters. In the recent June quarter, L&T’s Defence engineering segment recorded a 37 per cent growth over the same period last fiscal.

Subsidiaries deliver

L&T’s listed technology subsidiaries have done extremely well on the revenue and margin fronts consistently over the past few years.

L&T Infotech and L&T Technology Services look set to achieve strong double-digit revenue growth in FY19, when the IT industry itself is expected grow by 7-9 per cent, in dollar terms, according to the trade body Nasscom. Both companies have been among the top few mid-tier software services players. With a weak rupee, margins would get a boost. L&T holds over 80 per cent stake in these companies as the profits from these firms will strengthen its own bottom-line.

L&T Financial Services too had a good FY18, with disbursals growing at a healthy space. Net NPAs were down to 2.34 per cent from 5.02 per cent in the previous fiscal, suggesting that it has recovered considerably from the effects of the currency ban. Its assets under management in the investment management business increased by 68 per cent in FY18 to ₹65,392 crore.

These subsidiaries are likely to add considerable value to consolidated financials of the company.