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Strong order pipeline boosts growth outlook

3Q performance supported by robust order inflows

LT’s 3QFY24 revenue beat our estimates, but lower-than-expected margins led to a miss in PAT. The company reported 19%/14%/15% YoY growth in revenue/EBITDA/PAT on a consolidated basis. Core E&C revenue and EBITDA grew by 25%/13% YoY in 3QFY24. LT has been benefiting from strong inflows, particularly from international geographies, and has received orders worth INR1.8t during 9MFY24 for its core E&C segment. The company has maintained its focus on mega and ultra-mega projects and has been able to improve working capital YoY to 16.6% of sales. However, margins are still below the guidance owing to legacy order execution and new orders still not achieving the margin recognition threshold. We expect LT to continue to benefit from the strong addressable market in both India and international locations. We revise our estimates to bake in improved inflows and lower margins. We increase our TP to INR4,200 based on the SOTP methodology, valuing the core business at P/E of 28x Mar’26E EPS and a 25% holding company discount for subsidiaries. Our higher multiple takes into account the continuously improving prospect pipeline and improvements in NWC and RoE, despite margins being lower than guidance. We maintain BUY on LT.

Revenue beat estimate, but margin was a miss

Consolidated revenue grew 19% YoY to INR551b in 3QFY24, ahead of our estimate. EBITDA rose 14% YoY to INR57.5b but came in 7% below our estimate due to lower-than-expected margins in the core E&C segment. PAT grew 15% YoY to INR29.5b. Core E&C revenue increased by 25% YoY to INR393b, ahead of our expectation. Margin declined ~80bp YoY to 7.7% vs. our expectation of 8.5%. Thus, core EBITDA grew 13% YoY to INR30b. Working capital improved further to 16.6% of sales for core E&C and RoE inched up to 15.2%. The order inflow in 3Q stood at INR601b, up 32% YoY, resulting in a strong order book of INR4.7t. For FY24, LT has guided for 20%+ growth in order inflows, revenue growth in high-teens, and margins of 8.25-8.5%.

Total 4Q prospect pipeline up 29% YoY; Middle East pipeline remains strong LT’s

order book grew 22% YoY to INR4.7t, with an order book-to-revenue ratio of 3x. Overall inflows were mainly driven by international business as domestic inflows remained weak in 9MFY24. LT’s prospect pipeline for 4QFY24 stands at INR6.3t, up 29% compared to 4QFY23. The pipeline has been boosted by strong order inflows in the hydrocarbon segment. The infrastructure sector forms 65% of the overall prospects, while the hydrocarbon segment makes up 27%. Stable oil prices auger well for prospects in the hydrocarbon segment and improve overall prospects in the Middle East. The company is cautiously bidding for thermal power projects. The hi-tech energy segment is still small, with a prospect pipeline of INR160b, but it will grow at a fast pace.

LT well managing risks in international and Saudi-based projects

The share of international projects in the total order book has increased to 39%, with Saudi Arabia accounting for nearly 29% of the order book at INR1.35t. The Middle Eastern regions, particularly Saudi Arabia, are witnessing strong traction in the hydrocarbon and renewable energy segments. With the share of Saudi Arabia moving up, LT is managing risks well by investing in talent and building teams in international locations for projects in the hydrocarbon and energy transition verticals. LT has relocated a senior management team for large projects and has also localized contract management teams. The company bids for new projects after taking into account the client profile, project financing, payment terms and margins, and building sufficient cushion as most of these contracts are fixed-price in nature.

Focus remains on reducing working capital and improving return profile

LT has been focusing on reducing working capital through improved collections and better customer advances. Despite reporting lower margins than the guidance, the company was able to improve RoE by 280bp YoY to 15.2% as it reduced working capital by 240bp to 16.6% of sales. With expected improvements in margins in FY25, there is scope for further RoE expansion. We expect working capital to remain comfortable at around 17-18% of sales, as the overall project mix is changing in favor of projects that have low NWC, such as international and mega and ultra-mega projects.

Improving prospect pipeline and control over working capital to drive 26% PAT CAGR over next three years

We expect a CAGR of 18%/23%/26% in revenue/EBITDA/PAT over FY23-26 for LT’s core EPC division. The growth is expected to be driven by (1) 18% growth in order inflows, led by a strong prospect pipeline; (2) a gradual recovery in core EPC EBITDA margin to 9.1%/9.7% by FY25/26; and (3) control over working capital and NWC at 18% of sales. We expect the infrastructure and hydrocarbon segments to remain the key growth drivers for LT.

Valuation and view

We increase our TP to INR4,200 based on the SOTP methodology, valuing the core business at P/E of 28x Mar’26 EPS and a 25% holding company discount for subsidiaries. We maintain BUY on LT. Our higher multiple takes into account the continuously improving prospect pipeline and improvements in NWC and RoE despite margins being lower than guidance.

Key risks and concerns

A slowdown in order inflows, delays in the completion of mega and ultra-mega projects, a sharp rise in commodity prices, higher crude prices, an increase in receivables and working capital, and increased competition are a few downside risks to our estimates.

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