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Slow but stable at core; future ready

L&T met consensus forecast on top line/EBITDA led by stable core E&C execution, support from non-core profitability, etc. The key highlight was robust INR380bn-plus core order intake, a stable NWC profile and better Q4 prospects—for both business and balance-sheet. 9M results at core E&C reflect ~90% (slow) of FY20 revenue levels with a better recurring EBIT margin profile given job mix/cost focus by L&T at core.

Management highlighted the Q4 pipeline of INR3.9tn while reiterating cash-over-billing persistence. They expect better execution ahead as sites further normalise. And we see better cyclical and structural factors offering healthy growth/returns potential. Retain ‘BUY’.

Core E&C largely at FY19/20 scale; recurring margins stable

L&T’s in-line consolidated sales/EBIDTA versus consensus is led by its healthy infra execution & services growth with stable infra OPMs & better performance for the services segment. Core E&C sales/EBIT margin for 9M stood at INR677bn (up 16% YoY; at ~90% of FY20 levels) and 7.4% (versus 7.6%/9.1% adj/reported 9MFY21 EBIT margins), respectively. New order for Q3/9M for L&T at core stood at INR380/856bn, implying growth of 26%/40% YoY ex-INR320bn HSR order last year. Some key highlights include: recurring savings of INR1bn/quarter from H’bad metro debt recast and upside from positive EBITDA potential (INR300mn in Q3) as ridership improves. FY22E guidance largely hinges on infra execution.

Way forward for L&T; relevant aspects and variables for investors

L&T’s competitive positioning in core E&C business and investors’ perception on capital allocation/returns have been improving in our view. Cyclical pickup in core E&C execution and OPM/WC improvement should be getting better with manmaterial-money at sites normalising. Potential from non-core exits including H’bad Metro dynamics turning favourable, and a comprehensive ESG focus are some aspects worth noting in sequential quarters ahead. Though we admit, execution/OPMs so far (core) has been slow; it will remain a critical variable to track.

Outlook and valuation: Cyclically-structurally well set; retain ‘BUY’

As L&T gets its house in order – be it cash over revenue at sites or capital allocation/return focus or ESG – we see far better translation on bottom line returns as domestic infra spends pick up. While we retain ‘BUY/SO’ on the stock, we are revising its SoTP to INR2,330 (up from INR2,195) as we roll forward to Q1FY24E.

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