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Overall good performance, outlook positive

L&T being the largest infrastructure and capex play with proven execution track record yet again delivered another strong quarter in a seasonally weak quarter with strong order inflow which remained marginally better than estimates. Company’s consolidated Revenues/Ebitda/PAT grew at 22%/25%45% yoy while core sales grew 24% yoy on improved execution. Consolidated margins marginally up by 22bps impacted by cost headwinds and some delay in claim settlements. Order inflow at ?418bn increased 57% yoy and has remained strong driven by Infra, defence and hydrocarbon. Tender pipeline for 9MFY23 stands at ?7.66trn diversified across Hydrocarbon (21%), Water (16%), Buildings & Factories (15%), Transport infra (14%), Power/ Renewables (14%) & Heavy Civil (13%). There was sharp improvement seen in order finalization to tender ratio at 70% vs 39% in Q1FY22 (50% in FY22). Management remains confident of achieving order inflow guidance of 12-15% for FY23 which remains reasonable given better deal win ratio. Order book of ?3.63trn is at a record high out of which domestic accounts for 72% and rest is international. NWC to sales ratio stood at 20.9% vs 22.9% in Q1FY22 and management retained its guidance of NWC to sales at 20-22% for FY23. Overall management maintained FY23 guidance of revenue and order inflow growth of 12-15% and EBITDA margins of 9.5% in core biz.

L&T is optimistic on growth prospects in India owing to higher than estimated tax collections, govt’s continued thrust on infra spending and is hopeful of private capex revival by H2FY23. Tendering activity in Q1FY23 was ?2.6trn vs ?1.35trn in Q1FY22. In the Middle East region it expects strong traction on the back of higher crude prices. Infrastructure and hydrocarbon opportunities are likely to open up in the Middle East, African sub-continent on the back of enhanced bi-lateral/ multi-lateral funding support. We expect performance parameters for Hyderbad metro to look up in FY23 as challenges are also moderating given better ridership coupled with some positive developments (Telangana government monetary assistance, debt refinancing, phased transit oriented development monetization plans) from Q4FY22 onwards. Further company’s constant focus to divest its non-core assets should boost its RoE. L&T’s ‘Lakshya 2026 Plan’ is focusing on scaling up new business opportunities (Green Hydrogen, Electrolyzers & Battery manufacturing, SuFin, EduTech) which are now in the incubation phase and are expected to bring significant benefits in future. We retain our estimates which remain unchanged largely factoring in the guidance & we maintain ‘BUY’ with a SOTP based target price of ?2,087.

Outlook & Valuation

We retain our estimates which remain unchanged largely factoring in the guidance & we maintain ‘BUY’ with a SOTP based target price of ?2,087. We believe, risk-reward is favorable for L&T (trading at 19x FY24E core EPS). L&T remains the best proxy for domestic capex and the key beneficiary to tap the opportunities both from the public and private sector. Having a strong order pipeline coupled with healthy order book provides good revenue visibility ahead. L&T’s ‘Lakshya 2026 Plan’ is focusing on scaling up new business opportunities which are now in the incubation phase and are expected to bring significant benefits in future.

Key Risks

Slowdown in the domestic macro-economic environment or weakness in international capital investment can negatively affect business outlook and earnings growth.

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