Why Motilal Oswal Is Bullish On The L&T Stock?

Healthy order book

One of the reasons to buy into the stock, which has fallen in line with the markets is the healthy order book position.

"Our deep dive into L&T's core order inflows (Rs 2.5 trillion) over the past two years reveal the benefits of a diversified Engineering, Procurement, Construction player - an ability to adjust business model to growth avenues, both segment wise as well as geographically. Together with the services revenue stream, such a fungible business model has helped L&T grow its consolidated top line every year over the past few decades, as far as we recollect," the firm has said in its report.

According to the Motilal Oswal report, the key risks would be as follows:

1) Key risks in such a business model are (a) the company's ability to manage working capital cycle, and (b) unforeseen execution challenges across segments, orders and geographies. L&T's past track record has not been too great on this front, especially the losses in the hydrocarbon business over FY15-16. However, we do realize that such risks are inevitable in the E&C business, especially given L&T's size. Thus, it is more important to create enablers to bounce back from such short-term setbacks.

2) The COVID-19 situation presents challenges on multiple fronts for the EPC business including new order wins, execution, working capital cycle, etc. While we do not expect L&T to be completely immune to such challenges, the situation would be more challenging for various mid-sized EPC companies. Thus, over the medium-to-long term, the company should be able to consolidate its market share further in India's construction sector.

Order wins on strong footing with likely positive surprise to FY20E estimates

"Order inflow announcements been strong lately: In the past one month, L&T has announced core E&C orders worth Rs 300 billion plus (calculated at the mid-point of the order size classification range). Together with earlier announced orders, the company is well placed to meet our 4QFY20E/FY20E overall order inflows (incl. services) of Rs 513 billion/Rs 1.8 trillion (-13%/flat YoY).

Note that as order inflows are announced only after confirmation from clients and with a lag, L&T may report overall order inflows in excess of our assumption and closer to its annual growth guidance of 10-12%. However, more than just the order inflow wins, execution of the same would be a key monitorable hereon, in our view," the firm has said in its report.

Valuation and view

"We maintain our earnings estimate and target price of Rs 1,200 with target multiple of 16 times on the core business (25% discount to long-term average to capture near-term uncertainty). While FY21E looks challenging from growth perspective, we do expect a bounce-back in FY22E, helped by a lower base and stabilization of working capital. At current market price, the stock trades at FY21E/22E P/E of 14.8x/10.7x (adjusted for valuation of subsidiaries). Maintain Buy," the Motilal Oswal report has noted.

Disclaimer

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