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A large win in the Middle East, likely to beat its order inflow guidance for FY24

As per media reports (Link), L&T is the preferred contractor for USD 3.9bn order for Jafurah Unconventional Gas Field, Saudi Arabia (Source: MEED). Also, till date in FY24, L&T has announced orders worth over INR 750bn. With this significant accretion in orders, L&T could report >20% growth in order inflow in Q2 (excl. services), in our view. Note L&T has highlighted that order prospects have improved QoQ (for the first time on prospects from the Middle East hydrocarbons). However, it has maintained its order inflow growth guidance of 15% YoY for FY24. Given the order inflow including the above mentioned order, we expect L&T to beat its earlier order inflow guidance. Also, we like the renewed focus of L&T to reward minority shareholders with a significant buyback announced in Q1FY24. We believe RoE is likely to improve by 200bps in the medium term. We raise FY25E PAT and also increase target multiple for the standalone business. Upgrade to BUY.

Order win of USD 4bn in the Middle East

A media report indicated that L&T has been issued a letter of intent in the Middle East for two packages worth total USD 4bn. Aramco is the developer of Jafurah field, which is the first unconventional gas field of Saudi Arabia with 2trn cubic feet of reserves. It has awarded the contract for phase 1 worth USD 10bn. The total estimated cost of the field is USD 100bn over the life of the field.

Likely beat in order inflow guidance in FY24

L&T had announced an order inflow of INR 660bn in Q1FY24. It has further announced INR 150bn till date in Q2. Including the above mentioned orders, we expect order inflow for Q2 to be in a similar range or overall order inflow growth print to be >20%. As a result, we expect full year order inflow at INR 2.2trn, > 15% growth.

Renewed focus on rewarding shareholders

L&T has recently announced share buyback plan worth INR 100bn at a price of INR 3,000/share and has cash worth INR 240bn as of Mar’23 (standalone).

We upgrade to BUY with a target price of INR 3,141/share

We upgrade the stock to BUY on strong consecutive order inflow for two quarters (Q1, Q2FY24), which could likely result in beat to order inflow guidance for FY24, a significant buyback to reward shareholders and consequent improvement in RoE. We expect margin improvement in Q4 and FY25E for core business amidst benign RM prices. We upgrade the stock to BUY with SOTP based TP of INR 3,141 (assigning 30x FY25E to EPC business).

Outlook and valuation

L&T had an orderbook of INR 4.13trn (3x TTM ex-services sales) as of Jun‘23 and has announced orders worth INR 127bn in Q2FY24 till date. After Q1, it had announced that its potential order pipeline has increased beyond INR 10trn in Jul‘23 (vs INR 9.7trn in May’23) owing to increased order prospects from the Middle East. L&T had announced its order inflow growth guidance at 10-12% in FY24 (vs INR 2.3trn in FY23). However, if the mega order from the Middle East materialises, its H1FY24 order inflow is likely to touch INR 1.2trn (more than 20% growth YoY). Orderbook as of Sept‘23E is expected at INR 4.3trn (with book-to-bill ratio > 3.3x of FY23 revenue). Given the business moat in terms of execution capabilities, increased potential order pipeline and fruition of potential orders into actual order inflows, we assign a target multiple of 30x FY25E P/E (vs 25x FY25E earlier) to the standalone business (EPC business) owing to increased revenue visibility going forward. We arrive at an SoTP- based target price of INR 3,141 where standalone business is valued at INR 1,789. The balance is other listed subsidiaries and cash. We have valued the listed subsidiaries as per their market capitalisation and adjusted the same for the shares held by L&T in the same. We have increased our FY25E PAT by 4.7% on account of better margins owing to easing inflationary pressures and higher execution of new orders. We upgrade the stock to BUY (vs Add earlier) with a revised target price of INR 3,141/share. Key risks: 1) Slowdown in hydrocarbon capital expenditure due to any fluctuation in crude oil prices and 2) risk of slowdown in government capex due to upcoming general elections.

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