L&T likely to outperform guidance after strong Q1 FY25 performance

Assuming valuations at around 30 times price-to-earnings and valuing holdings in listed subsidiaries at a discount of 25% to fair-value, there could still be an upside of 15-20%

L&T surprised on the upside of consensus due to stronger-than-expected growth overseas. The Q1FY25 results were ahead of estimates on both revenue and net profit fronts. The company reported a 15 per cent year-on-year (Y-o-Y) growth in revenues along with 15 per cent Y-o-Y growth in operating profit and 12 per cent Y-o-Y growth in net profit on consolidated basis.

The core engineering & construction (E&C) revenues grew by 18 per cent Y-o-Y, with core E&C margins improving by 10 basis points to 7.6 per cent.

E&C revenue growth was largely driven by improvement in overseas revenue, although domestic revenue was flat Y-o-Y due to elections, labour shortage, and heat wave. The order inflows were up by 8 per cent Y-o-Y and the order book expanded 19 per cent Y-o-Y. But the order prospect pipeline was down by 10 per cent Y-o-Y due to a drop in hydrocarbon prospects. The net working capital remained under control at 13.9 per cent of sales.

L&T reported better-than-expected core E&C performance with revenues of Rs 38,620 crore, led by the Infrastructure segment, which grew by 22 per cent Y-o-Y to Rs 26,900 crore. Energy projects revenue grew 27 per cent Y-o-Y to Rs 8,490 crore. The core E&C operating profit margin was 7.6 per cent. For the infrastructure segment, margin improved 70 basis points Y-o-Y to 5.8 per cent while energy projects margin contracted 40 basis points Y-o-Y to 8.7 per cent.

Core E&C operating profit grew 21 per cent Y-o-Y. Return on equity (RoE) improved to 14.7 per cent of sales. Order inflow grew 8 per cent Y-o-Y to Rs 54,440 crore with overseas orders up 25 per cent Y-o-Y while domestic orders declined 1 per cent Y-o-Y, due to elections. The order book is Rs 4.9 trillion (up 19 per cent Y-o-Y).

On a consolidated basis, revenue grew 15 per cent Y-o-Y to Rs 55,120 crore, while operating profit rose 15 per cent to Rs 5,620 crore. Margin was flat Y-o-Y at 10.2 per cent, while net profit increased by 12 per cent Y-o-Y to Rs 2,790 crore. For FY25, management maintained guidance of order inflow growth of 10 per cent, revenue growth of 15 per cent, net working capital to sales of 15 per cent, and margin of 8.25 per cent. The Q1 leaves optimism for outperformance of guidance.

Domestic revenue growth was affected by elections and labour issues, and a sharp rebound could occur in H2FY25. International orders could drive revenue growth. The international segment forms 38 per cent of the order book with 92 per cent of international orders coming from the West Asia. There’s a decline in hydrocarbon prospects (Rs 2.2 trillion, down 37 per cent Y-o-Y). In the domestic infrastructure pipeline, the company is eyeing projects in water, urban transportation, bridges, T&D, and renewables. L&T expects a “hit rate” of 20-25 per cent in the domestic prospect pipeline with opportunities in new areas such as offshore wind projects, where it has won an order of $100 million. It is also looking at green hydrogen and nuclear projects.

L&T’s RoE stands at 14.7 per cent and it has long-term guidance of 18 per cent RoE. This target could be achieved with lower losses from Hyderabad Metro, and improvement in margins, and capital restructuring in terms of rewarding shareholders.

Assuming valuations at around 30 times price-to-earnings and valuing holdings in listed subsidiaries at a discount of 25 per cent to fair-value, there could still be an upside of 15-20 per cent. The concerns would include slowdown in order inflows, delays in project completion, any rise in metal/ cement prices and increase in working capital.