Edelweiss Financial Services has a buy call on Larsen Toubro with a target price of Rs 2,050.The current market price of Larsen Toubro is Rs 1,311.40.Time period given by the brokerage is one year when Larsen Toubro price can reach the defined target.
Investment rationale by Edelweiss Financial Services-Growth and profitability improve across key segments: LTs revenue growth was strong across all key verticalsservices (up 31 per cent YoY), heavy engineering/hydrocarbons at 22/38 per cent and domestic infra at 14 per cent.
This translated in to strong 42 per cent YoY EBIDTA spurt, much higher than Streets/our estimates.
While working capital jumped QoQ to 20.0 per cent from 19.5 per cent, given higher mobilisation, it is unlikely to see major spike given managements focus on its core strategy of cash flow-based growth.Encouraging management commentary boosts growth confidence: Management has walked the talk over the past few quarters, preferring cash flow/profitability over growth, reflected in improving balance sheet and rise in operating margin.
Commentary on strong Rs 5.3tn order pipeline and sustainable infra execution lends comfort to FY19 revenue/order inflow growth guidance of 12-15 per cent/10-12 per cent.
We believe, risk (if any) is only on the upside given tailwinds from the services sector and broadening infra, which is complementing core earnings.Outlook and valuations: Reengineering core; maintain BUY: We envisage managements sharpened cash flow and RoE focus to bear fruits over the medium to long term.
However, volatility in the domestic market (key growth driver) will be key monitorable, especially as we approach election period.
We perceive reasonable scope for improved market share with fewer EPC balance sheets capable of handling growth opportunities, making a case for potential re-rating for LT.
We maintain BUY/SO.