09-09-2023 11:09 AM | Source: ICICI Securities Ltd
Buy Larsen & Toubro Ltd For Target Rs.3,141 - ICICI Securities
News By Tags | #3848 #872 #3518 #1302

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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).


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