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L&T being the largest infrastructure and capex play with proven execution record yet again delivered another strong quarter on all fronts beating estimates across revenue/Ebitda/PAT with strong order inflow which remained better than our and street estimates. Company’s consolidated Revenues/Ebitda/PAT grew at 23%/23%29% YoY while core sales grew 39% YoY on improved execution. Consolidated margins was stable YoY due to improved performance in financial services and Hyderabad Metro, which saw ridership improving to 355k per day. Order inflow at 519bn increased 23%/24% QoQ/YoY wherin 67% coming from domestic market. Orders were received across multiple segments like public spaces, nuclear power, irrigation, ferrous metal, health, renewables and refinery sectors. L&T’s total ordering prospects/pipeline for remaining H2FY23E at 6320 bn, comprising 5000 bn of domestic and 1320 bn of international pipeline. Tendering during the quarter was strong; however, awarding was muted with the award to tender ratio at 34% (vs. 69% in Q1FY23). Management remains confident of achieving order inflow guidance of 12-15% for FY23 which remains reasonable given the order inflow in H1FY23. Order book of 3.7trn is at a record high out of which domestic accounts for 72% and rest is international. The NWC to sales ratio was stable at 20.9%. LT has guided FY23 NWC to sales in the 20-22% range. Overall management maintained FY23 guidance of revenue and order inflow growth of 12-15% and core EBITDA margins of 9.5%. Company 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. We expect performance parameters for Hyderbad Metro to look up in FY23 as challenges are moderating given better ridership 355k/day while the Hyderabad Metro debt is expected to reduce to 70-80bn, from 130bn, in 2-3 years, led by 30bn of soft loan assistance from the Telangana government and 20-25bn from TOD land monetisation. This shall make the project self-sustainable. 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 which are now in the incubation phase and are expected to bring significant benefits in future. Given record OB with strong order pipeline, some revival in private capex and improving health of Hyderbad Metro provides healthy outlook ahead. We have tweaked our estimates given better performance in first half and subsidiary valuation recalibaration. We maintain BUY with a revised PT of 2281.

Q2FY23 Summary: L&T posted revenue of 427.6bn (+23%/+19% YoY/QoQ). Segment-wise infra projects/energy projects/hi-tech manufacturing/ITTS/FS/development projects/others reported YoY revenue growth of 39/(7)/4/29/6/15/18%. International sales contributed 37% to revenue. The group level EBITDA came in at 48.9bn (+22.6%/+23.8% YoY/QoQ), a beat of 11%. EBITDA margin, at 11.5% (11.5%/11.0% in Q2FY22/Q1FY23), was stable due to improved performance in financial services and improved ridership in Hyderabad Metro. Margin in the project and manufacturing division was muted at 6.6% (down 170bps YoY), owing to a onetime 80-bps impact of close-out cost and a 90-bps impact of unfavourable job mix and cost pressure in certain projects. Consequently, APAT was at 22.3bn (+29.4%/+31% YoY/QoQ. L&T has restated its guidance of 12-15% YoY growth in FY23 revenue (strong bias towards the upper range), with an EBITDA margin in projects and manufacturing business at 9.5%

Strong ordering; record high OB: L&T registered an order inflow of 519bn in Q2FY23 (+23%/+24% QoQ YoY), with 67% coming in from the domestic market. OB at the end of Sep-22 stood at a record high of INR 3.7tn, with infrastructure at 72%, constituting a major share of it, followed by Energy at 19% (hi-tech manufacturing at 5% and others at 4%). Geography-wise, domestic orders contribute 72% to OB.

Challenges moderating for Hyderabad Metro: Better ridership 355k/day (vs. 285k/day passengers in Q1FY23). The management is hopeful that the ridership will touch the 550k-600k mark in the next six quarters as there are no Covid restrictions. Further, the Hyderabad Metro debt is expected to reduce to 70-80bn, from 130bn, in 2-3 years, led by 30bn of soft loan assistance from the Telangana government and 20-25bn from TOD land monetisation. This shall make the project self-sustainable. Hence, we expect performance parameters for Hyderbad Metro should look up in FY23 as challenges moderate

Balance sheet remains strong: Net D/E increased to 0.89x from 0.82x at Jun’22 end. The NWC to sales ratio was stable at 20.9%. LT has guided FY23 NWC to sales in the 20-22% range. Capex in traditional business is expected at INR 25-30bn every year whereas the overall Capex in new businesses of datacenter, electrolyser and storage batteries is expected at around INR 70-75bn.

Outlook & Valuation

Given record OB with strong order pipeline and revival in private capex along with improving health of Hyderbad Metro provides healthy outlook ahead. We have tweaked our estimates given better performance in first half and subsidiary valuation recalibaration. We maintain BUY with a revised SoTP based PT of 2281.We believe, risk-reward is favorable for L&T given reasonable valuation. Further, 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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