Buy Larsen & Toubro Ltd For Target Rs. 4,000 By Emkay Global Financial Services Ltd
Well managed quarter; reiterate BUY
We maintain BUY on L&T while cutting our SOTP-based Mar-26E TP by ~12% to Rs4,000 (upside of 20%). L&T’s resilient Q4/FY25 performance reflects in its well-diversified range of engineering and manufacturing capabilities as well as exposure to multiple geographies and end-customers. As a result, revenue/EBITDA/PAT grew 11%/13%/17% YoY, supported by 30bps YoY core EBITDA margin expansion, along with strong cash flows and RoE of ~16%. This was mainly led by continued momentum in international execution. Order inflow remained strong with large marquee orders across multiple geographies for Q4 and FY25. The management pointed to a considerably strong prospect pipeline of Rs19trn for FY26 (Rs12.1trn for FY25), leading to strong order inflow visibility. Slowdown in execution and delay in order inflow conversion due to geopolitical tensions remain key near-term concerns.
Order inflow continues to be robust
L&T’s Q4/FY25 P&M order inflow stands at Rs721bn/Rs2.9trn, up 29%/20% YoY. For FY25, growth was led by Infrastructure (+22% YoY), Energy (+19% YoY), and Hi-Tech Manufacturing (+28% YoY). BTG order from NTPC, Hydrocarbon, Defense (k-9 Vajra-T guns), and the Solar PV Battery Storage Gigascale project in Abu Dhabi and the Offshore Compression project in Qatar were the key notable orders during the year. International share in P&M formed 71% of the order inflow during the quarter. Per the management, the order pipeline remains robust in the Middle East, in areas like Energy Transition, Hydrocarbon, and other infrastructure, etc. Overall prospective pipeline for FY26 stands at Rs19trn, up 57% YoY.
Key beneficiary of capex tailwinds due to large scale and capability
With unmatched scale and capability, L&T is well placed to navigate short-term volatility in the capex cycle, while benefiting from long-term tailwinds of capex growth in India and overseas (Middle East). In the domestic market, we expect government capex to be meaningful after some softness in FY25. In overseas markets too, L&T has significantly upgraded its skills/capabilities in the Middle East, emerging as the top contractor in terms of project awards in Saudi Arabia in 2023. Order book of Rs5,791bn, at over 3.1x annual revenue, provides enough cushion against the risk of any capex consolidation.
We reiterate BUY with lower TP
We lower our earnings by 7-8% for FY26/27E, by building in lower EBITDA margin owing to lower near-term profitability in the hydrocarbon business and increased fixed-price order backlog, from 42% to 46%. L&T is trading at core P&M multiple of 25x/20x FY26E/27E EPS, and offers an attractive risk-reward, in our view, given strong EPS CAGR (+23%) over FY25-27E, strong return profile with RoE moving toward 19% in FY27E, and robust cash flows and balance sheet. L&T’s current multiple is at a discount to the historical average (23x), and is attractive vs broader industrial/infra space, while offering strong earnings growth and higher RoE.
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