Decent upside in L&T stock; analyst recommendations strongly positive

Infrastructure and engineering giant, Larsen & Toubro (L&T), reported encouraging results in the first quarter of the 2022-23 financial year (Q1FY23) and strong order-flows going forward. A change in the commodity cycle could cut costs and lead to better Ebitda margins going forward though the company also has significant exposure to higher interest rates.

Core revenues were at Rs 35,850 crore, up 22 per cent year-on-year (YoY) and down 32 per cent quarter-on-quarter (QoQ). Ebitda was at Rs 3,956 crore, up 25 per cent YoY and down 39 per cent QoQ. Cost of finance was at Rs 756 crore, up 7 per cent QoQ and down 8.5 per cent YoY. Working capital needs were around 21 per cent of sales — down 2 per cent YoY. Adjusted PAT was Rs 2,293 crore, up 47 per cent YoY and down 43 per cent QoQ.

Order inflows at Rs 41,800 crore were up 57 per cent YoY driven by Rs 12,000 crore in large order wins driven by offshore hydrocarbon E&P and also by a large order in the Middle East and a large defence order in India. The order-book of Rs 3.6 trillion is 83 per cent driven by the public sector, which indicates that private sectors are not yet picking up. Management estimates 3 per cent of orders are slow-moving while close to 28 per cent are overseas orders. The guidance is for revenue growth at 12-15 per cent in 2022-23 and similar order flow growth.

The Ebitda guidance is for a margin of 9.5 per cent, which implies improvement of about 130 basis points over Q1 Ebitda margin of 8.2 per cent. It’s likely that L&T will exit its road concessions (valued at Rs 1,100 crore) and also its Kudgi transmission project.

L&T sees Rs 7.6 trillion in order prospects (Rs 6.1 trillion domestic and Rs 1.5 trillion international). This includes Rs 5.6 trillion of infrastructure across power T&D, water, transportation-infra, heavy-civil, buildings and factories, etc. It also sees Rs 1.6 trillion of order prospects in energy (hydrocarbons and power generation) and Rs 40,000 crore in defence-heavy engineering. Rule of thumb calculations indicate that the company already has three fiscals worth of orders to execute and it should be able to maintain the order-growth rate. About 33 per cent of orders are fixed rate while the rest is cost-linked to various indices.

The stock has moved up almost 3 per cent, to Rs 1,797, since results were declared on Tuesday evening. It has outperformed the Nifty-50 comfortably with 17 per cent return in the last month and 12 per cent in the last year. Analyst recommendations are strongly positive and valuation for the stock range between Rs 1,960 to Rs 2,215, which means a decent upside.