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L&T reported a good quarter better than estimates largely led by strong execution displayed in the P&M segment (+24% YoY) and better ordering activity providing healthy execution visibility ahead. Ordering inflows surged 72% YoY predominantly attributed to securing two substantial international orders in the Hydrocarbon sector. Strong ordering led to the ordering backlog at ?4.5tn growing 21% YoY translating into 3.2x TTM sales. Margins in P&M were lower impacted by the execution of weak margin orders bagged earlier. For H2FY24, the tender pipeline stands at ?8.8tn, up by 39% YoY, primarily fueled by the infrastructure segment (?5.06tn), including Transportation infrastructure (26%), Water (20%), Building & Factories (18%), Power (13%), Water (20%), Heavy Civil (13%), and Minerals & Metals (10%). Given the outperformance on the revenue and order inflow front in H1FY24, management has guided for an upward bias of beating the top end of its guidance on revenue (FY24 guidance: 12%-15% YoY growth) as well as on the order inflow front (FY24 guidance of 10%-12% YoY growth). However, management has revised its margin guidance for the P&M business to 8.5-9% from the earlier 9%. Cut in margin guidance is more a function of deferral in new orders getting to the margin threshold. Also, currently, the primary focus is on executing legacy projects, with expectations of completing the majority of them by Q3FY24. Notably, there has been also improvement in the Net Working Capital (NWC) intensity, at 16.7%, attributed to the enhancement in Gross Working Capital at 57.1% (compared to 65% in September 2022). This reflects the improved collection momentum in the core business. Consequently, the ROE has risen to 15.3%, up 310 bps since March 2023. Further, improving ridership in the Hyderabad metro and ToD monetization helped Hyderabad Metro book profits. Given record OB with strong order pipeline, revival in private capex healthy outlook ahead we remain positive on L&T earnings growth prospects. We have tweaked the estimates factoring strong execution and order inflow and marginally lowered margins given some delay in core margins recovery. We maintain ‘BUY’ with a SOTP based TP of ?3,230.

Q2FY23 Result Summary: L&T (consolidated) performance was meaningfully ahead of estimates Sales at ?510 bn (+19% YoY) were ahead of expectation wherein Core/ Non-core business were up 25%/ 10% YoY. EBIDTA at ?56.3 bn (+15% YoY) supported by a better than estimated margin in the service business. EBITDA margin stood at 11% down 41 bps YoY. PAT stood at ?32.2 bn (+44.6% YoY), supported by higher than estimated other income. EBIT margin for Core/ Non-core stood at 6.0%/ 20.6%, -78bps/ +359bps YoY. NWC intensity stood at 16.7% in Q2FY24, vs 19.8% in Sept’22. TTM RoE stood at 15.1%. Management also emphasized that improvement in working capital is not merely due to more customer advances from the large order inflows, more because the company ensured that there are no slippages in execution by ensuring better collection visibility.

Segment wise Results

Infrastructure segment sales saw a growth of 27% YoY to ?246 bn where domestic business saw a growth of 12% YoY, while overseas infra grew 90% YoY. Domestic and international ordering momentum continued in Q2FY24 and the order book continues to remain robust leading to strong execution during the quarter. Order inflow stood at ?280 bn registering a growth of 12% YoY supported by high-value orders. The prospect pipeline for FY24 remains strong at ?5.06 trn (+11% YoY). Infrastructure margin declined 120 bps YoY to 5.4% due to job mix and execution of legacy contracts.

Energy segment sales grew by 22% YoY to ?68 bn, where domestic business declined 22% YoY whereas overseas business registered healthy growth of 103% YoY. Robust execution momentum in international projects drove hydrocarbon revenue growth; lower revenue in power is reflective of a depleting order book. Order inflow stood at ?401 bn (+376% YoY) with receipt of two ultra-mega hydrocarbon orders in the offshore vertical and a FGD order in power business. The prospect pipeline for FY24 improves drastically to ?3.4 trn (+125% YoY). Margin stood at 9.5% (+100 bps YoY) despite inline margin in the hydrocarbon business supported by strong margin improvement in a power business job.

Hi-tech manufacturing segment witnessed a growth of 30% in sales supported by both heavy engineering and defence business. EBITDA margin contracted 3.6 pps YoY to 14.9% mainly reflecting the execution phase of jobs in the portfolio. Order inflow witnessed a 35% YoY growth to ?24 bn supported by a key order in the defence business; however, deferrals impacted order inflow in heavy engineering business. The prospect pipeline for FY24 remains stable at ?0.26 trn.

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