IGI Logo

Rightly placed to benefit from macro improvement

TP increase driven by IT subs

* L&T remains best story to play capex upcycle: L&T’s core E&C business remains best placed to benefit from any capex upcycle, supported by its leaner asset-light business model and diversified segments. Therefore, although the Buildings and Power segments were weaker in FY21, this was largely offset by strong orders from the international Power T&D and Hydrocarbons segments. L&T’s capability to win large ticket size projects, such as airports and high-speed rail (HSR), has been remarkable and has compensated for its exit from the Roads sector.

* Business model only strengthens in past few years; await macro upturn: Since its last five-year plan announced in 2016, L&T has been strengthening its business model by exiting non-core businesses, going asset-light (no exposure to road HAMs), and sharpening its focus on receivables rather than just execution. L&T continues to maintain high liquidity on its balance sheet. On account of the pandemic, order inflows have been weaker, especially if adjusted for a one-time big ticket size order (HSR project) and weak state finances. However, things should start to improve as we move past the pandemic. In fact, surprisingly, other capital goods stocks are factoring in strong order inflows over the next 3–5 years and trading at elevated multiples, while L&T’s stock has been an underperformer, especially when adjusted for subsidiary valuations. We do not see any strong fundamental reasons to justify such a stark difference in stock price performance.

* Catalysts to watch out for: Over the next two years, we see multiple catalysts emerging for L&T, including (a) asset monetization for Hyderabad Metro and Nabha Power, (b) FCF generation of USD1.5–2.0b p.a. in the core business, (c) an improvement in order inflows prior to the elections, and (d) improved execution, aided by a better working capital cycle – as the government focuses on capex towards economic growth and job creation. If the macro improves, the strong FCF generation should enable L&T to hike dividend payouts as there is hardly any capex requirement beyond the maintenance capex.

* Increase TP to INR1,950, largely driven by MTM of listed IT subs: In the past month, L&T Infotech has rallied ~18%, MindTree ~28%, and L&T Technology Services ~11%. Factoring in the current market prices of the listed subsidiaries (after applying an unchanged holding company discount of 20%), our TP for L&T now stands at INR1,950. Adj. for the valuation of subsidiaries, the core business is available at FY23E PE of 13.5x v/s the long-term one-year forward average PE multiple of 22x. We maintain a Buy rating. L&T is our top pick in 500 the wider Capital Goods sector as a proxy to play India’s capex story.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer