Buy Larsen and Toubro; target of Rs 3437: Prabhudas Lilladher

Prabhudas Lilladher's research report on Larsen and Toubro

Larsen & Toubro (LT) reported healthy set of quarterly performance with consolidated revenue growth of ~19.3% YoY, while margins contracted 41bps YoY, due to business mix and legacy project reaching completion. NWC to sales improved to 16.7% vs 19.8% in H2FY23, owing to strong cash collections with FY24 guidance maintained at 16-18%. Tender prospects from Infrastructure stands at Rs5.06trn and Hydrocarbon Rs2.9trn for H2FY24. Hyderabad metro reported profit of Rs2.4bn vs loss of Rs3.3bn in Q2FY23, owing to increased ridership and TOD monetization. Management is confident to surpass its earlier guidance on order inflows and revenue growth of 10-12% and 12-15% respectively for FY24. Management revised its core margin guidance to 8.5%-9% from 9% guided earlier, factoring in multiple jobs not reaching margin recognition threshold in FY24. We believe L&T is well-placed to benefit in long run with 1) strong tender prospects, 2) better order conversion in domestic market, 3) significant traction in hydrocarbon and 4) renewable energy orders from international markets like Saudi Arabia and expected uptick in private capex in domestic market.

Outlook

The stock is currently trading at PE of 30.3x/25.7x/22.1x FY24/25/26E. We revise our FY24/25E by 6.1%/5% factoring in improved performance of Hyderabad Metro, strong order book and tender prospects. We roll forward to Sep’25E and maintain ‘Buy’ rating on stock with revised TP of Rs3,437(Rs3,302), valuing core business at PE of 24x Sep’25E.