Larsen & Toubro (L&T) is an Indian technology, engineering, construction, manufacturing and financial services conglomerate with global operations.
FY21-end order book position to stimulate revenue growth:
Order inflows remained robust with 76% YoY growth during 3QFY21, thanks to large orders like the High Speed Rail. With this, L&T has largely made up for weak order inflows in 1HFY21. Even with flattish order wins in the 4Q, L&T would end FY21 with a record high order book of INR3.5t (+16% YoY). This would translate into a multi-year high order book-to revenue ratio of 3.7x, providing strong revenue visibility over the next 2-3 years. While certain large ticket size orders may have a longer execution period, its strong order book position and low base of FY21 would help in clocking over 16% revenue CAGR over FY21-23E.
Infra investments and faster economic recovery could spur revenue growth further:
The government is looking to increase its focus on Infrastructure, which augers well for the outlook. In Union Budget 2021, government chose capex / infra investments as a vehicle to drive growth. Allocations to several infrastructure schemes wereenhanced (Roads and Water – Jal Jeevan Mission), whilesetting up of a development financial institution (DFI) was announced which could go a long way in securing long-term debt financing for the sector. In addition, as COVID-19 vaccines get rolled out, the speed of economic recovery could accelerate which holds key for infrastructure spending. Thus, any faster than expected improvement in the macro environment is a key catalyst for L&T’s earnings growth. We believe L&T is a preferred play on overall capex in the country.
Strengthening Balance sheet:
L&T has rightly prioritized Balance Sheet strength over growth during the current COVID-19 crisis. On the back of E&A sale, current cash and cash equivalents stand over INR450b, with negligible net gearing in the core business. The current working capital stood at 26.2% of sales. The management aims is to reach FY20 working capital levels by FY21-end. This requires a bit higher collection ask rate, but should be achievable - helped by better execution, seasonal improvement in working capital cycle by 4QFY21-end, and strengthening government financials.
Valuation and view:
We expect L&T to witness core E&C revenue/EBITDA/adjusted PAT CAGR of 16%/14%/17% over FY21-23E. Our estimates largely account for commodity price inflation risk. Our consolidated revenue/EBITDA/adjusted PAT CAGR estimate stands at 16%/20%/29% over FY21-23E, helped by L&T Finance Holdings and lower losses in Hyderabad Metro. Maintain Buy with TP of INR1,625 per share on account of: a) core business target P/E multiple of 20x v/s longterm average of 22x, and b) contribution from four listed subsidiaries, after applying a 20% holding company discount. Adjusted for valuation of subsidiaries, L&T trades at FY22E/FY23E P/E of 19.7x/17.6x, providing ample valuation comfort. Should the stock move to its long-term average multiple of 22x, our target price would stand at INR1,725 per share, assuming no change in the valuation of its subsidiaries.
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