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L&T’s 2QFY24 PAT at INR 32.2bn beat estimate of INR 26.2bn (consensus: INR 28.3bn) led by higher revenue, gain of INR 5.1bn on TOD monetization and higher other income. P&M business EBITDA margin at 7.4% missed estimate of 8.2% due to pressure in legacy (preCovid) projects owing to time and cost overruns. Order inflows beat estimate and grew 72% YoY to INR 892bn with order backlog at INR 4.5tn (3.2x P&M revenue). NWC remained low at 16.7% of revenue (17% in June-23). While L&T lowering its FY24 margin guidance (8.5- 9% from 9% earlier) was a dampener, we remain positive on the outlook for FY25 and FY26 led by strong order wins, supportive execution environment and a likely margin normalcy (9- 10% historically for P&M). Strong EPS growth (25.3% CAGR over FY23-26E for P&M), lower asset intensity along with the recent buyback should drive ROE expansion. Maintain BUY with revised price target of INR 3380 with the P&M business valued at 25x Mar-26E EPS.

* Robust execution led by strong backlog; P&M margins miss estimate: Consolidated revenue/EBITDA grew by 19%/15% YoY to INR 510bn/ INR 56.3bn and beat estimate of INR 491bn/INR 53.7bn. Execution was particularly strong in Infra (+27% YoY) and Hydrocarbons (+29% YoY) segments. Core P&M business revenue/EBITDA grew by 24%/ 12.3% YoY to INR 349bn/INR 25.8bn with P&M margins at 7.4% (estimate: 8.2%, down 80bps YoY). P&M EBITDA missed estimate of INR 27.3bn due to continued pressure from low margin legacy projects in the infrastructure segment. The beat in the consolidated EBITDA was driven by gain of INR 5.1bn on TOD monetization in Hyderabad Metro.

* Order inflows remain robust; order prospects boosted by Hydrocarbons (HC): Consolidated order inflows grew 72% YoY to INR 891bn with P&M inflows of INR 730bn (+96% YoY; estimate INR 682bn). Order backlog remains strong at INR 4.5tn (3.2x TTM revenue). Prospects pipeline for 2HFY24 order wins stands at INR 8.7tn (+39% YoY) with HC pipeline at INR 2.9tn (+2.6x YoY). Management specifically highlighted large prospects in the Middle East (Saudi Arabia, Qatar and UAE) in the HC space.

* Likely to exceed order intake and execution guidance; margin guidance lowered: L&T expects to exceed its FY24 guidance of 10-12% growth in order inflow and 12-15% growth in revenue for the P&M business. We build-in 20% growth in P&M order inflow to INR 2.06tn (2HFY24E: INR 830bn, down 22% YoY) and 19.7% growth in execution in FY24. However, EBITDA margin guidance for the P&M business has been lowered to 8.5- 9% range from 9% earlier due to likely delay in margin recognition from newer projects even as older legacy projects drag the margins.

* Expect 25.3% CAGR in P&M earnings over FY23-26E; supports valuations: We expect EPS CAGR of 25.3% over FY23-26E for L&T’s P&M business. Strong growth, reducing asset intensity (lower NWC & asset sales) and push from the recent buyback should drive ROE expansion to 18.5% by FY26 (12% in FY23). Valuations at 25.1x/20.8x FY25E/26E P&M business EPS remain well supported. Our revised SOTP-based price target of INR 3380 values the P&M business at 25x Mar-26E EPS. Maintain BUY

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