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Order inflow momentum likely to continue

* Larsen & Toubro (L&T’s) recent performance in terms of strong execution and order inflow growth, is a clear reflection of the government’s continued capital investment supported by structural reforms, robust tax collections and improving supply chain bottlenecks. The company witnessed an impressive 23% YoY revenue growth in H1FY23, and is currently at its highest-ever order book value of Rs3.72trn (3.1x TTM core business). This feat has been accomplished on the back of strong inflow growth of 36% YoY. As of Sep’22, L&T management estimated order prospects of Rs6.3trn for H2FY23, which we believe would enable 12-15% growth in consolidated order inflow and revenues for FY23E. We expect this momentum to continue at least until FY24Eend, up to the general elections. However, given commodity price stabilisation after over a year of high volatility, private capex spends (primarily from minerals & metal) are expected to catch up. We remain positive on L&T, however given the recent runup in stock price (26% in 6 months), we retain our ADD rating and SoTP-based target price of Rs2,262.

* Robust order pipeline ahead: The order prospects for 2HFY23 stood at Rs6.3trn as on Sep’22, with infrastructure forming the major share (~72%). Within infrastructure, water has the highest share (22%) while minerals & metals being the lowest at 5%, mainly led by private capex. We see urban infra spends as one of the growth drivers going ahead with strong capex planned for metro development. Currently 782 km of metro network is operational along with another 454km under construction. Further, ~1500 km is in the approved + proposed stage across India.

* Strategic growth roadmap to achieve 15% revenue CAGR by FY26: L&T is targeting for revenue of Rs2.7tn, implying a 15% CAGR over FY22-26. The company’s long-term strategic plan entitled ‘Lakshya 2026’ centres on the major themes of (i) incubation and scale-up of new-age businesses (green hydrogen, electrolysers, data centres, ecommerce), (ii) profitable expansion with sustainable growth in the current business portfolio, and (iii) divestment of non-core assets, and may lead to targeted RoE of 18%.

* Hyderabad metro average ridership has improved in YTDFY23 and we expect it to reach ~400,000 passengers per day for FY23 from 1,55,000 in FY22. Current metro balance sheet is at Rs160bn, of which Rs130 is external debt. L&T aims to reduce its debt to ~Rs75bn over the coming years with help of Rs30bn long-term interest-free loan from the government of Telangana (would be disbursed in tranches over next two years) and monetisation of Transit oriented development worth Rs20-30bn. With improving ridership coupled with concerted efforts towards reducing debt and thereby interest cost (Rs14.8bn in FY22), we expect a gradual improvement in the bottom-line (FY22 net loss was at Rs17.5bn).

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