Larsen & Toubro : Strong order prospects; retaining a Buy - Anand Rathi Share and Stock Brokers
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Strong order prospects; retaining a Buy
L&T’s Q2 was encouraging: robust order inflow (excl. Services: up ~23% y/y) and strong, ~24% y/y, higher revenue in its core business. Higher costs, however (inflation- and project closure- related) contained operating profitability. On the sturdy order backlog, continuing healthy pace of execution and better collection, it retained its 12-15% core revenue-growth guidance. With a better conversion ratio expected on Rs6.3trn order prospects in H2 FY23, management also retained its 12- 15% order inflow growth guidance. We expect the sustained double-digit growth momentum, focus on cash-flow generation & execution and less exposure to non-core assets to augment return ratios. On rolling forward to FY25 and a run-up in subsidiaries, we raise our TP to Rs2,287 (Rs2,089 earlier), based on a sum-of-parts valuation. Our Buy rating is held.
Guidance retained. With an encouraging H1 (revenue, order growth) and optimism due to the momentum that has been building, management decided to stick with its FY23 12-15% inflow and revenue guidance (chances of hitting the upper end). The H1 margin lagged guidance, but management is hopeful of its guided-to ~9.5% FY23 core-business margin. The recent moderation in some key inputs and an envisaged better job-mix as well as greater scale would help.
Prospects bright. The strong domestic growth momentum was aided by private and public capital expenditure. Private capex is gaining traction, with orders comprising 29% of domestic inflows in Q2 FY23 (22% last year). The inflow momentum looks set to continue with a strong, Rs6.3trn, prospects pipeline, and envisaged better conversion ratio. Of this, opportunities abound in infra (~Rs4.5trn), hydrocarbons (~Rs1.13trn), power (Rs0.38trn) and heavy engineering (Rs33bn), Defence eng (Rs160bn) and “smart” world (Rs80bn).
Valuations. Healthy H1 make us raise our order and revenue estimates, but prune margins keeping in mind actuals. We introduce FY25e, with ~11% y/y higher orders, ~13% y/y better revenue and a 9.7% core business EBITDA margin. At the CMP, the stock trades at 15.8x the FY25e core-business EPS, vs the TP-implied exit multiple of 18x. Risks: Sluggish capex, delay in ordering
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