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Remarkable earnings growth, positive outlook

Larsen & Toubro Ltd (L&T) is an engineering and construction (E&C) conglomerate, with a presence in the information technology (IT) and financial services sectors as well. It operates in over 30 countries.

• Consolidated revenue grew 19.3% YoY to Rs. 51,024cr in Q2FY24, backed by strong growth in infrastructure, energy and hi-tech manufacturing segments.

• EBITDA also increased 15.1% YoY to Rs. 5,632cr. However, EBITDA margin fell 40bps to 11.0%, led by execution of low-margin projects and an increase in sub-contracting charges and admin expenses.

• The company’s performance was robust with solid growth in top line and order book. Its resilient order book and excellent execution capabilities should support future earnings performance. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 3,348 based on sum-of-the-parts (SOTP) valuation.

Resilient execution across verticals drives performance

In Q2FY24, consolidated revenue increased 19.3% YoY to Rs. 51,024cr, backed by excellent execution of orders, expansion in infrastructure projects and improved hitech manufacturing portfolio. The infrastructure projects segment reported a revenue of Rs. 24,977cr (up 27% YoY) owing to strong project execution across sites. The energy segment generated Rs. 6,794cr in revenue (+21.5% YoY), aided by a recovery in execution momentum in the hydrocarbon business. In addition, the hi-tech segment recorded a revenue of Rs. 2,041cr (+28.5% YoY) owing to effective project execution. IT & technology services (IT&TS) revenue rose to Rs. 11,247cr (+10.4% YoY) due to a rise in demand for tech-based services. International business revenue (with Rs. 21,898cr) accounted for 43% of the total revenue. EBITDA rose 15.1% YoY to Rs. 5,632cr, while EBITDA margin fell 40bps YoY owing to rise in sub-contracting charges and admin expenses. However, the management expects the margin to improve in the future as it has already completed most of the low-margin legacy orders.

Strong order book growth across business segments

During the quarter, L&T received substantial orders across segments amounting to Rs 89,153cr, registering a significant 72% YoY growth. International orders contributed 67% to the total order book at Rs. 59,687cr. The infrastructure projects segment also reported a healthy growth of 12% YoY to Rs. 27,990cr, with international orders contributing 24% at Rs. 6,775cr. The energy segment secured orders worth Rs. 40,141cr, thanks to two ultra mega projects in the Middle East. The hi-tech manufacturing secured orders of Rs. 2,395cr (up 35% YoY).

Key concall highlights

• The company successfully completed its first-ever buyback of 31.25 million equity shares at Rs. 3,200 per share through the tender offer route, resulting in a total cash outflow of Rs. 1,280cr.

• Hyderabad Metro revenue grew with increased ridership and monetisation of commercial property. Metro ridership rose to 0.462mn/day vs 0.355mn/day in Q2FY23 and achieved the highest ever ridership in a day at 0.547mn/day

Valuation

The company delivered a remarkable earnings performance in Q2FY24, with substantial revenue and order growth across segments. The management is confident of surpassing the earlier guidance of revenue (12-15%) and order inflow (10-12%) growth thanks to the exceptional execution of projects in H1FY24 and higher order inflow prospects. Hence, we remain optimistic about the company's outlook and reiterate our BUY rating on the stock with a revised target price of Rs. 3,348 based on SOTP valuation.

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