Buy Larsen and Toubro; target of Rs 2945: LKP Research

LKP Research's research report on Larsen and Toubro

Larsen & Toubro Limited (L&T) reported a good quarter better than estimates led by strong execution and better ordering activity providing healthy execution visibility ahead. L&T (consolidated) reported a healthy 34%/23%/36% YoY growth in revenues/EBITDA/PAT. Ordering inflows surged 57% YoY driven by driven by Rail, Renewables, Rural Water Supply, Power T&D, Building & Factories, and Onshore & Offshore verticals of the Hydrocarbon business. Strong ordering led to the ordering backlog at ₹4.1tn growing 14% YoY translating into 3.1x TTM sales, strengthening the prospects of L&T reaching the upper end of the 12-15%. Domestic order book accounts for 71% of this total, while international constitutes 29% from Middle East (87%) and Africa (5%), with the remainder coming from various countries in the SEA. Tendering pipeline too remains strong at ₹10.1tn for 9MFY23 is higher than the end-FY2023 number of ₹9.7tn, primarily boosted by a sharp increase in Hydrocarbon order prospects. NWC intensity stood at 17% in Q1FY24, up by 360bps YoY continues to improve on better collections. TTM RoE stood at 12.8%, up 60bps vs Mar’23 and RoE is trending well toward L&T’s 18% targeted levels by FY2026. Improving ridership in the Hyderabad metro and growing support from the state government, enhancing the case for monetization of the asset. Going forward, management has maintained its guidance for revenue growth of 12-15% for FY24, with order inflows growth at 10-12%. For Core E&C business, L&T has maintained its guidance guided for EBITDA margin of ~9%. NWC/sales will remain in the band of 16-18% backed by increase in GCC orders, timely payment and certification.

Outlook

Given record OB with strong order pipeline, revival in private capex healthy outlook ahead. We have tweaked FY24 to factor strong order inflow, while FY25 estimates are largely unchanged. We maintain ‘BUY’ with a SOTP based TP of ₹2,945.

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