Analyst Call Tracker: Capex cycle, order book drive upside for L&T

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The firm’s strong order book, with L&T receiving orders amounting to Rs 89,153 crore, higher by 72 percent on-year, contributed to the bullishness on the scrip. “The management is confident of surpassing the earlier revenue guidance of 12-15 percent, as a result of the exceptional execution of projects in H1FY24 and higher order inflow prospect,” said Geojit.

Outperformance across verticals

In the second quarter of the current fiscal year, the infrastructure projects segment reported a revenue of Rs 24,977 crore, up 27 percent year-on-year owing to strong project execution across sites. The energy segment and the hi-tech segment recorded revenue increases of 21.5 percent on-year and 28.5 year on-year respectively, as a result of effective project execution.

IT & technology services revenue rose to Rs 11,247 crore, 10.4 percent higher compared to the corresponding quarter of the previous year, due to a rise in demand for tech-based services, noted Geojit.

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In the past decade, the company’s engineering & construction division (E&C) saw a revenue CAGR of seven percent, versus IT Services’ 23 percent. Elara Capital expects that in FY24E-26E, E&C will outpace IT Services, as a result of strong inflows.

The domestic brokerage suggested that E&C will see FY23-26E revenue CAGR of 18 percent versus IT Services’ 14 percent. “Also, despite domestic inflows facing the risk of disruption from elections, international orders may be buoyant,” added Elara Capital.

ESG Concerns

Some concerns over L&T’s involvement in nuclear and cluster munition areas have been raised by international ESG rating agencies. L&T is associated with work on India’s nuclear submarine Arihant and on Pinaka missiles, said Jefferies. However, L&T’s published FY23 annual report states that the business does not manufacture any explosives or ammunition of any kind.

“L&T’s defence revenues is two percent of overall consolidated financials, and we do not foresee defence becoming more meaningful as capex in power and industrials are on an upswing,” added the global brokerage, further saying that any ESG rating upgrade will be an increased benefit for the stock.

Target prices

“Led by robust long-term new order pipeline, both globally and domestically, growth for E&C will surely rev-up,” said Elara Capital, maintaining its ‘buy’ call on the stock with a target price of Rs 3,750 per share.

Jefferies has a target price of Rs 3,400 apiece with a ‘buy’ call on the counter, stating that the hydrocarbon and heavy engineering segments should continue to see improving margin trend.

Citi raised its target price from Rs 3,500 per share to Rs 4,000, noting that L&T remains the brokerage’s top pick on continuing strong capex growth in India. Citi is also positive on the firm’s strong execution capabilities.

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