Larsen & Toubro rallies 3% on strong outlook; stock surges 14% in 3 weeks

L&T share: Focus on lower balance sheet intensity, restructuring of metro project and focus on cash flows will drive rerating for the stock

L&T share price: Shares of Larsen & Toubro rallied 3 per cent to Rs 3,743.10 on the BSE in Friday's intraday trade, extending its gain on a strong business outlook. In the past three weeks, the stock of the engineering & construction (E&C) major has surged 14 per cent. In comparison, the S&P BSE Sensex has gained 2.4 per cent during the same period. The stock had hit a record high of Rs 3,859.65 on April 2, 2024.

L&T is India's largest E&C company, with an interest in EPC projects, and hi-tech manufacturing and services. The company primarily operates in infrastructure, heavy engineering, defence engineering, power, hydrocarbon, services business segments. Infrastructure segment contributes around 45 per cent to consolidated revenue followed by services (30 per cent), and international markets (25 per cent of backlog from international markets).

Analysts believe L&T's consolidated revenue will grow at 8 per cent-10 per cent year-on-year (Y-o-Y) annually in FY25 and FY26, backed by the strong order inflow during FY23 and FY24.

India Ratings and Research (Ind-Ra), for instance, expects the consolidated order book to grow at a sustainable pace over FY25-FY26 due to order inflows from both domestic and international segments. Overseas orders are likely to be driven majorly by the hydrocarbon and the power & transmission segments, especially in the renewable sector.

The consolidated order book stood at Rs 4.758 trillion at FYE24 (FYE23: Rs 3.995 trillion; FYE22: Rs 3.576 trillion), to be executed predominantly over FY25-FY28. The strong order book across segments mitigates the risks arising from cyclicality in any particular segment, resulting in sufficient revenue stability. Moreover, about 70 per cent of the orders are covered through price variation clauses, thereby mitigating any significant commodity risk, the rating agency said.

Analysts at ICICI Securities, meanwhile, have assigned a 'Buy' rating to L&T. The brokerage firm values L&T at SOTP-based target price of Rs 4,300 (Base business at 35x FY26E EPS) and considers it as the best capex play in large-cap capital goods space. Focus on lower balance sheet intensity, restructuring of metro projects and focus on cash flows will drive re-rating for the stock, it said.

The management has guided for an order inflow growth of 10 per cent for FY25E albeit higher base of FY24 (order inflow growth of 31 per cent Y-o-Y). The same is achievable given a strong prospects pipeline of Rs 12.1 trillion, up 24 per cent Y-o-Y going into FY25E. The key prospects are lined up in the infrastructure segment (water/T&D/Transportation) to the tune of Rs 7.25 trillion whereas the hydrocarbon segment has prospects of Rs 3.87 trillion (mostly from international markets).

Hence, ICICI Securities expects standalone revenues and PAT to grow by 15.1 per cent and 16 per cent CAGR over FY24-FY26E, respectively. The company currently has a current order backlog of Rs 4.58 trillion and has guided for a 15 per cent revenue growth in FY25E.