L&T: Order execution, new initiatives key to long-term growth, say analysts

Long-awaited growth pick-up along with muted orders may weigh on Larsen and Toubro's stock in the near-term

The shares of Larsen and Toubro (L&T) bounced back 3 per cent from the day's low to hit an intra-day high of Rs 1,915 per share as investors looked past the muted December quarter (Q3FY22) result of the engineering and construction major and eyed long-term growth prospects.

"Operational performance was marginally below estimates impacted by lower than estimated margins in Core business. Sales at around Rs 39,600 crore (up 11 per cent YoY) was broadly in-line with expectation. Core segment (ex-services) revenue stood at Rs 27,200 crore (below our estimate of Rs 27,900 crore) whereas service segment revenue at Rs 12,300 crore was 4 per cent below our estimate. EBIDTA (earnings before interest, tax, depreciation, and amortisation) at Rs 4,530 crore was marginally below our estimate of Rs 4,820 crore impacted by weaker than estimated margins in the Core business (8.1 per cent; down 90bps YoY). Adjusted net profit stood at Rs 2,050 crore (down 9 per cent YoY) and was below our estimate of Rs 2,260 crore," said analysts at Antique Stock Broking.

That said, while the company saw orders worth Rs 50,359 crore in Q3, registering a 31 per cent YoY decline, the Mumbai-based company’s order book is at record Rs 3.40 trillion. This, analysts say, provides multi-year revenue visibility.

"Order backlog at Rs 3.4 trillion has improved 3 per cent QoQ and is up 11 per cent over pre-Covid levels. Growth visibility remains at high levels of 3.6 years on trailing annual revenues. Order backlog would likely improve further by end-FY2022 given the very strong order prospect pipeline for Q4," said Kotak Institutional Equities.

Overall, brokerages have maintained their stance on the stock and have marginally revised their target prices on the stock. Here's what each brokerage has to say:

Jefferies

Order flow disappointed at decline of 5 per cent YoYfor the first 9-months of FY22 as Covid third wave led to finalization delays. The management has maintained the 13-17 per cent YoY FY22 order flow growth guidance and we believe H2FY22 has triggers of guidance being met on strong pipeline, capex noise bytes and the strategic plan. We lower our price target to Rs 2,675 (from Rs 2,845), but maintain Buy, to account for lower IT sub valuations.

Nomura

L&T has digitalized its entire equipment fleet (11,000+ in number) which is leading to productivity gains. Management is focused on green technologies with some tie-ups announced on fuel cells in recent months. It continues to value L&T on an SOTP basis on FY23F and roll forward to Dec-23F estimates to arrive at revised target price of R 2,412, implying 27 per cent upside. Key risks are a delay in economic recovery, a sharp increase in cost of commodities such as steel and cement, and a rise in working capital.

JPMorgan

The brokerage has cut its target price on the stock to Rs 2,160 (from Rs 2,300) as it believes long awaited growth pick-up along with muted orders may weigh on the stock in the near-term. However, it maintained its "overweight" stance on the company given long-term benefits of free cash potential and strategic initiatives.

Credit Suisse

Credit Suisse has revised L&T's FY22/23/24 EPS estimates to Rs 68/93/114 from Rs 77/99/119. It says potential upside could originate from lower interest cost, asset sales/restructuring, procyclical traction on inflows, revenue and margin.

Citi

The brokerage believes L&T's stock is attractively priced and mayrise further as Q3 exhibited a healthy ordering environment, along with the ability to win orders. The brokerage has maintained a Buy rating with a target price of Rs 2,460.

Sharekhan

A strong rise in order prospects for Q4FY22 along with retaining guidance related to execution, order intake, operating profit margin (OPM) and working capital for FY22 are key positives from the Q3FY22 results. International outlook looks buoyant with a pick-up in crude oil prices. In the longer term, L&T remains at the forefront to reap benefits from the Atmanirbhar Bharat Scheme with its diversified businesses across sectors such as defence, infrastructure, heavy engineering, and IT.

The company remains the best proxy for domestic capex and an improving business environment. We maintain a Buy rating on the stock with a revised price target of Rs 2,270 factoring upwardly revised valuation of its key IT&ES subsidiaries and favourable core business valuation.

Kotak Institutional Equities

It took comfort from 9M core business PAT exceeding pre-Covid levels, backlog being 11 per cent ahead of pre-Covid levels, and the highest ever ordering pipeline for Q4. Improving ridership and refinancing of debt of Hyderabad Metro has boosted prospects of improving near-term and medium-term business returns, the remaining sore point for L&T. The brokerage has cut core business estimates by 4 per cent and has broadly retained its Rs 2,450 on higher value of IT business and roll-forward.

Motilal Oswal Financial Services

It believes the company is poised for a strong earnings growth momentum, if and when order inflow gains momentum. It has some more asset monetization opportunities to capitalize on, including the sale of Nabha Power, a stake sale in L&T IDPL, and monetization of the Hyderabad Metro.

It has maintained its earnings estimate, but decreased TP to Rs 2,165/share (Rs 2,295 earlier), to account for MTM of listed subsidiaries’ CMP (holding company discount of 20 per cent) and an unchanged target P/E multiple of 20x for the core business.

Antique Stock Broking

L&T has plans to tap new business like Solar PV modules (applied for PLI license), Green Hydrogen (entered into MoU with HydrogenPro AS for Electrolyser manufacturing) and Edutech business to ensure it stays ahead of the curve with new gen business. It remains positive on the long term prospects of the company and maintains Buy rating on the stock with increased target of Rs 2,420.