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L&T reported marginally weak set of results for 3QFY24 as revenue came in 5% ahead of our expectations while margins were 90bps lower and PAT 10% below estimate. Order inflow and order backlog remains strong with strong contribution from international segment. However, margin recovery in core EPC business remained weak. The management has upped its order inflow and revenue growth guidance whereas margins guidance in P&M segment has been marginally reduced. Overall order inflow trend remained strong with 32% YoY growth in order inflow in P&M segment driven by large orders in infrastructure and hydrocarbon segment. 67% of incremental new orders were received from international segment. International orders now constitute 39% of total orderbook and Saudi represents almost 1/3rd of total orderbook of the company thereby increasing geographic concentration risk. We have maintained our estimates and ADD rating on the stock and believe that execution is expected to remain strong with favourable tailwinds from domestic government capex and strong outlook on middle east economy.

L&T – 3QFY24 result highlights

L&T reported marginally weak set of results with Revenue/EBITDA growth of 18.8%/13.5% YoY. Revenue was 5% ahead of our estimate while EBITDA was below our estimate by 3%. Strong execution momentum continued in P&M business. EBITDA margins were subdued at 10.4% against our expectation of 11.3%. Legacy jobs are tapering off which should aid in margin expansion going forward. Consolidated PAT at Rs29.4bn was up 21.9% YoY but 10% below our estimate.

Orderbook remains strong with rising contribution from international segment

Order inflow in 3QFY24 came in at Rs760bn, up 25% YoY driven by infra and hydrocarbon segment. International orders comprised 67% of total order inflow. Closing orderbook stood at record Rs4,698bn, up 22% YoY. Given the strong prospects pipeline of Rs6.3tn, we expect orderbook position to strengthen further in FY24. Total international orders now constitute 39% of total orderbook and Saudi Arabia constitutes roughly 1/3rd of total OB which poses geographic concentration risk in our opinion. Additionally, more than 40% of total OB includes fixed price contracts which can lead to margin correction if commodity prices rise globally.

Guidance increased but still below what we are building in

The management finally increased its guidance for FY24 after strong execution so far in 9MFY24. The company has delivered 23% YoY growth in revenue and 49% YoY growth in order inflow in 9MFY24. Against this performance, the revised guidance for order inflow is 20% plus (12-15% earlier) and for revenue it is high teens (10-12% earlier). Needless to say that revised guidance remains conservative and is the company is likely to perform better. On margins front, the company has revised its guidance downwards for P&M segment from 8.5% -9% to 8.25% -8.5%. We are building in 24% YoY growth in P&M segment.

Maintain ADD rating and TP of Rs3,750

We are building in 18% revenue growth in core E&C business with more than 150bps margins improvement by FY26. We continue to value L&T based on SOTP method with core E&C business being valued at 26x PAT and add the value of listed subsidiaries based on 20% discount to current market cap. We also add the value of development business based on ~0.8x P/B to arrive at our target price of Rs3,750.

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