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Best-placed for a recovery

* Strong order book, better prospects and great execution capabilities all point to LT (ex IT/Fin/Dev. Projects) returning to mid-teen earnings growth. We expect 15% EPS CAGR over FY21-FY24E – similar to FY15-FY20. We expect centre and state capex to see a rebound after Covid second wave, similar to what happened last year.

* Our analysis of large projects in LT’s order book has not revealed any major red flag from the perspective of execution. We believe that once the second Covid wave recedes, LT will be able to clock double-digit sales growth over the medium term. Management remains confident on maintaining margin in the near term as well.

* Hyderabad metro’s Rs17bn loss dragged down FY21 EPS by ~15% yoy. LT is working on various options, such as fund infusion, monetization, stake sale and soft loans, to bring down the loss levels, and ridership is expected to rise after Covid 2 nd wave.

* We assume coverage on LT with a Buy rating and TP of Rs1,770 (June’22E). Improving core ROIC, strong & clean order book, increased opportunities in Renewables, Steel and Cement apart from Rail, Expressways and Water bode well for future trajectory

Tender pipeline remains firm, strong order book a cushion for any delay due to Covid:

While Covid second wave might delay the overall order inflow for the industry, we believe that LT’s tender pipeline in the last six months has been strong. This would mean that once the intensity of the pandemic comes down, the orders will be back in the system and LT will be a key beneficiary. LT has indicated that order prospects at Rs9.06tn for FY22 are up 8.5% yoy.

Hyderabad Metro – What are the options?

The Hyderabad metro reported a loss of Rs17bn in FY21 as there was no ridership due to Covid. Pre-Covid ridership had reached 400,000/day. How the WFH in the IT industry pans out in the future would be key for ridership pattern. The viability of this project hinges on debt structure, monetization and ridership. Overall debt of Rs145bn for the project needs to be pruned down as Rs14bn of interest servicing will need significantly high ridership. LT is looking to: 1) infuse funds to bring down debt (~Rs8-10bn); 2) raise funds through stake sale/sale of 1.3m sq.ft. ready real-estate; 3) claimed Rs37bn as project overrun from the state government; 4) requested for soft loans from the state government; 5) issue LT guaranteed bonds (it can save 250bps if these bonds replace existing bank loans at the Hyderabad metro level). We believe that a combination of these options will lead to a reduction in losses in the medium term.

We factor in 12% sales CAGR and 24% PAT CAGR (15% PAT CAGR ex-fin/IT/dev) over FY21-FY24E:

With book/bill at 3.3x and good order pipeline, E&C should clock 12% CAGR. Standalone ROIC should reach ~18% (average during FY16-20) from ~14% currently. We assume coverage with a June’22E TP of Rs1,770 and Buy rating. Our SoTP comprises Rs1,134/share for L&T EPC (incl. cash on books), Rs567/share for the stake in IT and Finance and Rs20/share for power projects and IDPL.

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