Motilal Oswal maintains ‘Buy’ on Larsen & Toubro; target price Rs 1,600

Domestic Engineering & Construction (E&C) is likely to witness a slowdown in execution in H2FY17 (+8 % in H1FY17) on account of demonetisation and continued execution challenges. The impact may linger longer for the ‘elite housing’ segment (6% of order book). We cut our FY17 order inflow estimates (+9% v/s +18% earlier) to factor in weak defense, infrastructure and power generation orders. We, however, expect a revival in FY18, led by higher government spending on infrastructure and defense. Maintain our ‘buy’ rating with a revised target price of Rs 1,600 ( 18x FY19E standalone EPS), adding Rs 490 for the subsidiaries.

Domestic infrastructure growth was subdued at 3% y-o-y due to extended monsoon, lack of clearances and payment delays.

Our dipstick survey on housing projects under construction by LT in Mumbai indicates that projects which are in advanced stages of construction or being built by reputed builders have seen minimal disruption. This, however, is not the case for newly launched projects or developers going through financial stress.

Our sensitivity analysis reveals that a delay in 50% of the projects would lead to a 4% earnings cut over FY17/FY18. LT’s FY17 order inflow growth guidance stands Rs 1.55 trn ( +15% y-o-y, H1FY17: 12%).

Larsen & Toubro Limited