Buy Larsen & Toubro Ltd For Target Rs. 4015 By JM Financial Services
Weak earnings; order inflow momentum continues
L&T reported weak earnings in 3Q25 as PAT at INR 33.6bn missed JMFe of INR 35.7bn (consensus: INR 38bn) impacted by weaker margins. P&M business revenue/ EBITDA grew by 20% each YoY to INR 473bn/INR 36bn (JMFe: INR 484bn/INR 39bn) with P&M EBITDA margin flat YoY at 7.6% (JMFe: 8%). Consolidated order inflows grew sharply by 53% YoY to INR 1.16tn and beats JMFe of INR 875bn. Domestic inflows grew sharply by 2x YoY to INR 540bn while international inflows grew by 23% YoY to INR 621bn. Order backlog grew by 20% YoY to INR 5.64tn (3.1x TTM revenues). NWC remained comfortable at 12.7% of revenue in Dec-24 (vs. 12.2% in Sept-24). Bid pipeline moderates to INR 5tn (down 19% YoY) for remainder of the year due to reduction in Hydrocarbon prospects and flat Infrastructure prospects. L&T is likely to exceed its 15%/10% revenue/order inflow growth guidance given the strong performance in 9M25. L&T maintained P&M margin guidance of 8.2% for FY25E. EPS growth for P&M business remains strong at 19% CAGR over FY24-27E. Lower asset intensity along with push from recent buyback should drive ROE expansion (14.8% in FY24 to 17.5% in FY27E). Maintain BUY with revised price target of INR 4,015 (P&M business valued at 30x FY27E EPS).
* Earnings missed JMFe due to lower than expected margins: Consolidated revenue grew by 17% YoY to INR 647bn (JMFe: INR 655bn) led by strong execution in Hydrocarbon (+53% YoY). Consolidated EBITDA grew by 9% YoY to INR 62.5bn (JMFe: INE 68bn). Adjusted PAT at INR 33.6bn (+14% YoY) missed JMFe of INR 38bn due to lower margins. P&M business revenue/EBITDA grew by 20% each YoY to INR 473bn/INR 36bn (JMFe: INR 484bn/INR 39bn). P&M business EBITDA margin remained flat YoY at 7.6%. It was below JMFe of 8% due to lower margins in Infrastructure segment (5.5% vs. JMFe of 6.4%).
* Order backlog grew by 20% YoY; Prospects pipeline moderates: L&T reported robust order inflows of INR 1.16tn in 3Q25, (up 53% YoY; JMFe: INR 875bn), driven by strong P&M inflows of INR 987bn (+64% YoY; JMFe: INR 704bn). Order backlog grew by 20% YoY to INR 5.64tn (3.1x TTM revenue). Prospects pipeline moderated to INR 5tn (-19% YoY), with hydrocarbon prospects down 16% YoY to INR 1.44tn, while infrastructure prospects remained flat YoY at INR 4tn.
* L&T likely to surpass revenue and inflow guidance for FY25E: L&T is likely to exceed its 15%/10% YoY revenue/inflow growth guidance for FY25E led by strong performance in 9MFY25. L&T maintained its 8.2% P&M margin guidance for FY25E (flat YoY) and expects margins to improve in FY26E (no specific guidance given). We have lowered FY26 P&M margin estimate from 8.8% to 8.5% leading to 5% cut in P&M EPS in FY26E.
* Expect 19% CAGR in P&M earnings over FY24-27E; supports valuations: We expect EPS CAGR of 19% over FY24-27E for L&T’s P&M business led by robust order backlog and margin expansion. Strong growth, reducing asset intensity (lower NWC & asset sales) and push from buyback should drive ROE expansion to 17.5% by FY27 (14.8% in FY24). Valuations at 24x FY27E P&M business EPS remain well supported. Maintain BUY with revised price target of INR 4,015 (P&M business valued at 30x Mar-27E EPS).
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SEBI Registration Number is INM000010361
