Shares of Larsen & Toubro, India’s largest engineering and infrastructure company, have advanced 87 percent over the past year, outperforming the benchmark and sectoral indices as the economic recovery, a healthy order book, and the government’s infrastructure push spurred the stock.
The S&P BSE Sensex rallied 48 percent in the past 12 months and the BSE Capital Goods index jumped 84 percent.
The stock touched a record high of Rs 1,717.90 on the BSE on September 1, gaining 28 percent in the past four-and-half-months.
L&T is an infrastructure conglomerate with interests in engineering, construction, manufacturing, technology and financial services. The company has orders worth more than Rs 3.2 lakh crore (20 percent from overseas), which experts said ensures good revenue visibility for the next few years. The infrastructure segment accounts for 75 percent of its orders.
Order pipeline
The company is one of the major beneficiaries of the government’s capital expenditure push. The government has boosted capital expenditure by 34 percent to Rs 5.5 lakh crore for FY22, with an extra Rs 2 lakh crore set aside by states and autonomous bodies.
“Considering the government’s focus towards economic growth, which will trigger the capex cycle over the next two years followed by private capex, we believe L&T is well-placed to capture those opportunities and will remain the top pick in the capital goods space as a proxy to India’s capex story,” said Jitesh Ranawat, head of institutional sales at Marwadi Shares and Finance.
According to Gaurav Garg, head of research at CapitalVia Global Research, L&T typically wins 20-25 percent of the projects it bids for and has a competitive advantage due to its ability to handle complex projects.
Following its FY21 results, the company said order traction from categories such as metro, railways, roads, expressways, water, renewables and power transmission and distribution are expected to grow. Revenue and order inflows are expected to grow in the low to mid-teens in FY22.
“The tender pipeline for FY22 remains strong, with domestic orders totalling Rs 6.6 lakh crore and international orders at Rs 3 lakh crore, which is a total of Rs 9.5-10 lakh crore. Due to the solid performance of the two segments, infrastructure and hydrocarbon, the company seems to be able to maintain a healthy order book,” said Garg.
Ranawat said L&T’s core engineering & construction business is doing well whereas the building and power segments remained a little weaker in FY21.
“They have also had strong order wins in international power T&D and the hydrocarbons space,” Ranawat said.
Its infrastructure segment revenue grew 63 percent to Rs 10,409 crore in the first quarter of FY22 from a year earlier, while the power business doubled to Rs 759 crore.
Revenue from hydrocarbon projects rose 37 percent to Rs 4,190 crore. Heavy engineering business revenue climbed 45 percent to Rs 548 crore and defence engineering revenue increased 46 percent to Rs 689 crore.
Divestment, Hyderabad metro project
L&T sold its entire stake in L&T Uttaranchal Hydropower to ReNew Power Services for Rs 985 crore in August, in line with its strategy of divesting non-core assets. The hydropower unit operates a 99 MW plant.
Last year, L&T sold its electrical & automation business to Schneider Electric for Rs 14,000 crore. Abhineet Anand of Emkay said Nabha Power will also be divested. Nabha Power runs a 2x700 MW supercritical thermal power plant at Rajpura in Punjab.
L&T’s investment in the Hyderabad Metro Rail has been hampered by cost and time overruns, apart from traffic loss caused by the Covid-19 outbreak.
Recently, media reports indicated the National Investment and Infrastructure Fund was in talks to invest Rs 4,000 crore in the metro project, said Garg. However, Anand noted that L&T has not commented on the matter.
“The company is looking at various options like assistance from the state government, stake sale, monetisation of real estate and refinancing of debt for the Hyderabad metro,” Anand said.
Tendering activity
A preliminary analysis of tendering activity for July and August suggests a YoY improvement, said Anand.
“Tendering, which was down around 14 percent YoY in Q1 of FY22, saw good growth (46 percent YoY) in July and August, leading to YTD growth of around 10 percent YoY. An uptick in roads, railways and water supply has been visible in recent months. We have also seen major states increasing capex in July, after a lukewarm Q1,” he explained.
Anand said L&T (ex-services) had posted an order inflow of Rs 15,100 crore in Q1 of FY22, which was up 10 percent YoY but below Rs 30,000 crore in Q1 of FY20. He said inflows will catch up in the rest of the financial year as tendering improves.
The company won Rs 26,557 crore of orders at the group level in the June quarter, a growth of 13 percent from a year earlier. The orders came from the metro, rural water supply, mineral and metal, residential, power transmission and distribution, power and hydrocarbon offshore sectors.
Earnings
L&T’s consolidated revenue increased 38 percent to Rs 29,335 crore in Q1 of FY22 on healthy execution of projects despite the second wave of Covid-19 affecting operations at many locations. Project progress was impacted by regional lockdowns, shortage of industrial oxygen and supply chain disruptions.
The company posted a consolidated profit of Rs 1,174 crore, almost quadrupling from a year earlier.
Fundamental call
Garg advised investors who have added the stock to their portfolios to hold it for a target of Rs 1,850 in three months and for a target of Rs 2,050 in six months, implying gains of 10-25 percent over the next six months.
Ranawat remains positive on L&T and expects a 20 percent upside from current levels in the next year.
Technical call
On a daily basis, the stock has traded in a channel for the past few years and started forming a broadening pattern in recent months.
“On a weekly basis, if the stock closes above Rs 1,800, then we may expect the stock to go above Rs 2,000-2,100 in the next three to six months,” said Garg.
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