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Core business on strong footing; margin delivery key monitorable

Our view

L&T reported an expectedly strong Q2FY24 print with continued momentum in core business revenue growth while infrastructure margin remains subdued. An increase in order pipeline to Rs8.8tn augurs well for continued acceleration in order inflow growth where energy related capex in the Middle East have been a shot in the arm. The turnaround in Hyderabad Metro profitability, all-time high PLF in Nabha Power would support further acceleration in bottom line growth. EBITDA Margin has remained subdued mainly on account of legacy projects pertaining to infrastructure segment while IT businesses have seen continued higher employee retention costs.

Looking Forward

Management expects legacy projects to be significantly exhausted by Q4FY24 while incremental execution of large projects could see fulfilment of margin threshold from FY25. Thus, margin recovery for the infrastructure remains a key monitorable. With the order pipeline getting significantly boosted both on domestic and exports front, there is significantly increased visibility for order inflow growth in the near term. The company is well placed to capture incremental business from Middle East from energy as well as other infrastructure segments. We remain positive on the company’s strong business model, robust bid pipeline, diversified order book and healthy balance sheet. We downgrade to Neutral (ADD earlier) given significant run-up in the stock price (~23% over last 6 months) with a revised SOTP-based TP of Rs2,938 (2,848 earlier).

Result Highlights

* Consolidated sales came in at ~Rs510bn (up 19% YoY; YSL estimate of ~Rs493bn) driven by a broad-based revenue growth. Infrastructure (+27% YoY), Energy Projects (+21% YoY) and Hi-Tech Manufacturing (+28% YoY) reported revenue growth in the 20s while services business dragged revenue growth. IT Services grew 7% YoY while Financial Services saw a revenue decline of 2% YoY. Strong growth was reported in Development Projects (+38% YoY) and Others Segment (+30% YoY).

* EBITDA came in line with our estimates at Rs56.3bn (YSLe ~Rs56.2bn) with EBITDA margins contracting 40bps YoY to 11% (+80bps QoQ) expansion. Infrastructure segment continues to report low single digit EBIT margin. Q2FY24 Infra EBIT margin stood at 4.1% (-130bps YoY).

* Adj PAT grew by 45% to Rs32.2bn (YSLe ~Rs30.2bn) helped by a lower-thanexpected tax rate at 23%.

* Order inflows grew by 72% YoY to Rs891.5bn with order book standing at a record ~Rs4.5trn, up 21% YoY.

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