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In line result; domestic business likely to gather steam

Maintains guidance; Balance Sheet improvement on track

* Adjusted PAT declined by 9% YoY to INR20.5b and was in line with our estimate (base year benefitted from bulky Real Estate sales). The company maintained its order inflow/revenue/core margin guidance, though it did highlight some risk of a spillover of order inflows from 4QFY22 into FY23.

* Adjusted for the HSR order won last year, core E&C order inflows grew 26% YoY to INR380b, with a two-year CAGR of 13%. On the execution front, core E&C domestic revenue grew 13% YoY (two-year at 6%), while international E&C revenue was flat. On the margin front, L&T has done a commendable job, despite commodity price headwinds, with core E&C (excluding Others, to adjust for the bulky Realty business) margin expanding 30bp YoY.

* We largely maintain our earnings estimate, but cut our TP to INR2,165/share (INR2,295 earlier) to account for mark-to-market (MTM) of listed subsidiaries’ CMP (LTI/LTTS/MTCL has corrected by ~20% each in CY22 YTD). After adjusting for the subsidiaries’ valuation (~INR950/share), the core E&C business trades at an FY23E/FY24E P/E multiple of 17.3x/15.6x v/s its historical one-year forward average P/E multiple of 22x. L&T remains the best play on the capex cycle in India. We maintain our Buy rating.

Satisfactory performance, outlook remains optimistic

* In line result on all parameters: Consolidated revenue grew 11% YoY to INR396b (in line). EBITDA grew 6% YoY to INR345.3b (in line). EBITDA margin came in at 11.5%. Adjusted PAT fell 9% YoY to INR20.5b (in line).

* Core E&C margin weathers commodity price inflation: Core E&C revenue grew 9% YoY to INR271b (in line). We note that core E&C revenue grew 4% on a two year CAGR basis, of which domestic core E&C grew at 6% CAGR, while international execution was -2%. E&C EBITDA margin came in at 7.5% v/s 9% in 3QFY21. If adjusted for the Others segment (largely the Realty business, which had bulky sales booking in 3QFY21), core E&C margin expanded by 30bp YoY. Commodity price pressure was offset by a better job mix in 3QFY22. Core E&C adjusted PAT fell 21% YoY to INR14.7b.

* Working capital in check: Working capital, as a percentage of sales, improved to 23.1% (v/s 26.2% in 3QFY21). While higher revenue aided working capital to sales ratio, the management said that collections in receivables have also begun improving, which is a key positive.

Update on order book and inflows

* Order book strong at INR3.4t: L&T’s order book grew 3% YoY to INR3.4t, with the order book/revenue ratio at 3.3x. The international business constituted 24% of the order book. In terms of clientele, the Centre/state governments formed 10%/29%, PSUs 44%, and the private sector 16%.

* Strong bid pipeline, final awarding holds key: The management said the bid pipeline remains strong, with the overall pipeline at INR3.9t (+48% YoY) for 4QFY22. The Infrastructure sector’s prospects stood at INR3.2t. The strong bid pipeline is encouraging, although a faster conversion to final awarding holds key to L&T meeting its order inflow guidance of a low-to-mid-teen growth. Our FY22E order inflow growth estimate stands at 7%, implying an ask rate of 36% in 4QFY22E.

Valuation and view

* Fundamentals fairly strong; macro tailwinds awaited: L&T rightly prioritized Balance Sheet strength over growth during the second COVID wave. Labor availability no longer poses a challenge. Execution is expected to improve from here on as construction activity picks up after the monsoon. We believe the company is poised for a strong earnings growth momentum, if and when order inflow gains momentum. It has some more asset monetization opportunities to capitalize on, including the sale of Nabha Power, a stake sale in L&T IDPL, and monetization of the Hyderabad Metro.

* Maintain Buy with a higher TP of INR2,165/share: We maintain our earnings estimate, but decrease our TP to INR2,165/share (INR2,295 earlier), to account for MTM of listed subsidiaries’ CMP (holding company discount of 20%) and an unchanged target P/E multiple of 20x for the core business. Note that in CY22 YTD, LTI/LTTS/MTCL have corrected by ~20% each. We estimate an FY21-24E EPS CAGR of 25%, led by 15% CAGR in the core E&C business and reducing losses from the Hyderabad Metro. After adjusting for subsidiaries’ valuation (~INR950/share), the core E&C business trades at an FY23/FY24E P/E multiple of 17.3x/15.6x v/s its historical one-year forward average P/E multiple of 22x. Should the stock revert to its historical average trading multiple of 22x, our TP for the stock will increase to ~INR2,285. L&T remains the best play on a capex cycle in India. We maintain our Buy rating.

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