Buy L&T, target Rs 1590: Prabhudas Lilladher

Brokerage house Prabhudas Lilladher has a buy rating on Larsen and Toubro Ltd with a target price of Rs 1590 (roll forward to March’18) given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance sheet. L&T reported decent set of numbers with sales up 9% YoY, EBITDA margin up 50bps YoY, PAT up 45% YoY and Order inflow up 14% YoY to Rs 297bn. Execution (up 18% YoY) and order inflow (up 67% YoY) was largely driven by international markets, while domestic market remained muted (execution up only 5% YoY and Inflows down 8% YoY.) E&C margins improved by 100bps YoY to 9.1% led by improvement in Power and Heavy engineering segment.

L&T maintained its guidance for sales growth of 12‐15%, order inflow growth of 15% and margin improvement of 50bps in FY17. Working capital remained stable at 23.5% of sales in Q1FY17 (v/s 24% sales in Q4FY16). It remained cautiously optimistic on domestic market. Prabhudas Lilladher has cut earnings estimate by ~8‐9% for FY17& FY18 to factor additional requirement of provision of ECL and employee benefits in INDAS.