Buy Larsen and Toubro; target of Rs 4088 Prabhudas Lilladher

Prabhudas Lilladher's research report on Larsen and Toubro

Larsen & Toubro (L&T) reported consol. revenue growth of 20.9% YoY, while EBITDA margin fell 70bps YoY to 10.3% with absence of one-time Hyderabad Metro TOD monetization gain (Rs5.1bn in Q2FY24) causing a ~90bps impact.. NWC to sales rose to 12.2% (vs 16.7% in Q2FY24) owing to lower gross working capital and strong collections. Although public state capex has slightly moderated, significant private capex investments are lined up, which will help drive strong domestic order intake in H2FY25. L&T has also re-entered bidding for BTG orders in thermal power projects, and is confident of securing ~4GW order from NTPC. Meanwhile, the company continues to make in-roads in new verticals of renewable energy (carved out a separate business vertical to streamline operations), electrolyzers (ramping up manufacturing capacity to 1GW in the long-term), data centers (commissioning 14MW projects and planning further expansions), and semiconductors (acquired a power semiconductor startup and inaugurated a new development center). International execution has been robust, while domestic execution should pick up in H2. We believe L&T is well-placed to benefit in the long-run owing to 1) strong international prospects led by Middle East, 2) healthy domestic pipeline on the back of public-driven capex and uptick in private capex, and 3) improving profitability in development projects, and 4) penetration in newer areas such as green energy, electrolyzers, semiconductors, data centers, etc.

Outlook

The stock is currently trading at a P/E of 29.9x/23.2x/19.6x on FY25/26/27E earnings. We maintain ‘Buy’ rating with an SoTP-derived TP of Rs4,088 (Rs4,130 earlier), valuing the core business at a P/E of 26x FY26E (same as earlier).

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