Kotak Institutional Equities maintained a 'sell' rating on Larsen & Toubro Ltd, lowering the target price to Rs 3,100 from Rs 3,753 per share amid concern over Saudi Arabia scaling down spending programmes.
Recent developments have raised doubts about the growth consistency of Saudi projects. Saudi Aramco has reduced the medium-term capex by $50 billion and hinted at reaching a capex peak earlier than expected. There are also reports of significant cuts in the scale of the $500-billion Neom programme, with reductions in the target population and project length.
"The recent announcement/news flow surrounding the scaling down of capex from Saudi Aramco and from Neom should warrant a rethink of whether the 20 percent higher-than-earlier share of L&T’s business from Saudi should be multiple-accretive or dilutive," Kotak Institutional said in its recent note.
Kotak has revised L&T's order inflow growth assumptions to 3 percent for FY2025 and 12 percent for FY26. Their fair value (FV) remains at Rs3,100, considering the potential diversification of defence-linked capabilities into civilian purposes. The current market price (CMP) implies a 34X P/E multiple on one-year forward core earnings, compared to their 23X multiple in the fair value assessment, it said.
"While our assessment of the remaining giga projects suggests that the aggregate level of ordering from Saudi may not fall from the current levels, it certainly creates uncertainty about other capex programmes getting curtailed and most likely takes out the argument that the Saudi business is growing at a healthy pace from the current base in the next five years," the Kotak report said.
L&T has undergone a significant 40 percent rerating in multiples over the past year, largely due to anticipated consistent growth from its Saudi business over the next decade. Other factors contributing to the rerating include investments in chip design, diversification of its defence arm into civilian projects, and an increase in private sector spending. However, Kotak said the rerating overlooks concerns such as prolonged margin weakness, a rising share of fixed-price contracts, and a potential slowdown in government spending.
Kotak said reduced business prospects could affect earnings in the short term. Despite winning $4 billion in orders from Neom projects, most of it will still contribute to L&T's $57-billion order backlog. However, growth in overall order inflows for L&T in FY2024 might be limited to single digits due to government's fiscal policies and decreased prospects from Saudi Aramco and Neom projects.
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