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JM Financial
L&T (Buy)
CMP: ₹1,364
Target: ₹1,560
L&T has delivered minus 2 per cent consolidated EPS CAGR in FY13–16, despite: i) 21 per cent EBITDA CAGR in the infrastructure (infra) segment, which forms 75 per cent of consolidated EBITDA; and ii) 23 per cent PAT CAGR in IT&TS, which forms 34 per cent of consolidated EBITDA. These were offset by slowdown/ losses/ strikes in other core segments such as heavy engineering (HE)/ hydrocarbons (HC) with heavy loss (30 per cent of consolidated PAT) in Developmental Projects (DP). However, H1 results have witnessed revival in HE/HC, while loss-making units are in sell-off mode. We believe in FY18–19, growth may bounce back for L&T’s core segments (Infra, HE & HC), resulting in 18 per cent EPS CAGR in FY16–FY19E versus minus 2 per cent in the past four years. Paring of bleeding subsidiaries will be an added bonus. However, its key growth engine — the Infra segment (40 per cent of EBITDA) — must see continued traction, as H1 execution was weak. Despite cutting FY17/18 estimates/ pushing growth into FY19, we find value in base case (₹1,560) versus 32 per cent upside in bull case. Our bear case despite assuming zero growth has limited downside.
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