30 March 2020
Larsen & Toubro
Near-term execution impact imminent
Working capital stabilization to determine extent of growth revival in FY22
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
1122.4 / 15.6
1607 / 661
In this report, we highlight some of the risks that have emerged for L&T’s (Larsen &
Toubro) business in the near term and its impact on earnings/cash flow.
We expect L&T to tide over these challenging times, thanks to multiple levers in its
business, scale of operations and the re-emergence as a pure EPC company.
However, on account of worsening working capital, growth post the lockdown in
India may be spaced over the next few months, impacting our near-term earnings
estimates and TP. We cut FY21/22E earnings by 20%/14% and TP to INR1,320.
Financials Snapshot (INR b)
EPS Gr. (%)
Div Yield (%)
FCF Yield (%)
Shareholding pattern (%)
Dec-19 Sep-19 Dec-18
FII Includes depository receipts
Stock Performance (1-year)
Execution halt in peak season to impact revenue growth:
lockdown in India has brought construction activities to a halt in the peak
season. We note that March is a peak month for construction activities in
India. Even post the lockdown, there might be some more delays in resuming
construction activities in full swing as labor, machinery and materials would
need to be re-mobilized. Thus, we see a clear risk to our revenue growth
assumptions for 4QFY20 as well as FY21E estimates.
Working capital likely to spike, recovery post lockdown may take time:
Historically, the month of March is marked by superior execution and higher
payments from government authorities, which brings down the year-ending
closing working capital. However, 4QFY20 will see absence of both execution
as well as payment push. Moreover, L&T would have to continue supporting
its vendor base, including sub-contractors, in these tough times as it has been
doing over the past many months. This is likely to increase its working capital
further. Working capital as % of sales stood at 23.5% at end-3QFY20 v/s 18%
at end-FY19. We fear that working capital can spike to 25% of sales in the near
term, implying no FCF for FY20/FY21, despite revenue and EBITDA growth.
Higher working capital is likely to weigh on the execution rate even after the
lockdown is removed, thus implying that recovery may not be as swift as
expected. Thus, we expect the focus to shift toward working capital
management in the near term. Moreover, we believe that L&T will start
showing improvement in FCF from FY22, thereby returning to the growth
trajectory given its scale of operations and multiple operating levers.
Oil price crash weakens prospects of hydrocarbon segment in near term:
hydrocarbon segment has been a key driver of execution and earnings since
the last 4 years (from the lows witnessed in FY15 when oil prices saw a
correction). Currently, the hydrocarbon segment enjoys the highest-ever order
book of INR450b+ and margins in double-digit. Over FY14-20E, the
hydrocarbon segment has witnessed an order inflow CAGR of 18%, driving
EBITDA CAGR of 33% subsequently v/s overall E&C order inflow/EBITDA CAGR
of 4% each. As international orders form ~50% of the order book for the
hydrocarbon segment, there is risk of order inflow growth tapering in sync
with the current level of oil prices.
Nilesh Bhaiya – Research Analyst
(Nilesh.Bhaiya@MotilalOswal.com); +91 22 6129 1556
Pratik Singh – Research Analyst
(Pratik.Singh@MotilalOswal.com) +91 22 6129 1543
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.