L&T: Order Fulfillment, New Initiatives Key to Long-Term Growth, Analysts Say

Shares of Larsen and Toubro (L&T) rebounded 3% from the day’s low to hit an intraday high of 1,915 rupees per share as investors looked past the muted December quarter result ( Q3FY22) of the engineering and construction major and were looking at long-term growth prospects.

“Operational performance was slightly below estimates, impacted by lower than estimated margins in the core business. Sales at approximately Rs 39,600 crore (up 11% yoy) were broadly in line with expectations. Main segment (non-services) revenue was Rs 27,200 crore (lower than our estimate of Rs 27,900 crore) while service segment revenue at Rs 12,300 crore was 4% lower than our estimate. EBIDTA (earnings before interest, tax, depreciation and amortization) at Rs 4,530 crore was slightly lower than our estimate of Rs 4,820 crore impacted by lower than expected margins in the core business (8.1%; in down 90bp y/y). Adjusted net profit came in at Rs 2,050 crore (down 9% y/y) and was lower than our estimate of Rs 2,260 crore,” the analysts said. at Antiques Stock Broking.

That said, while the company booked orders worth Rs 50,359 crore in the third quarter, registering a decline of 31% year-on-year, the Mumbai-based company’s order book hit a record 3 .40 trillion rupees. According to analysts, this provides multi-year revenue visibility.

“Order book at Rs 3.4 trillion improved by 3% QoQ and is up 11% from pre-Covid levels. Growth visibility remains at 3.6 year high levels on rolling year-to-date revenue. The order backlog would likely improve further by the end of fiscal 2022 given the very strong fourth quarter order outlook pipeline,” Kotak Institutional Equities said.

Overall, brokerages maintained their position on the stock and slightly revised their price targets on the stock. Here’s what each brokerage has to say:

Jefferies

Order flow disappointed with a 5% year-over-year decline for the first 9 months of FY22 as the third wave of Covid led to delays in completion. Management maintained order flow growth guidance of 13-17% YoY for FY22 and we believe H2FY22 has target triggers met on a strong pipeline, capex noise bytes and plan strategic. We lower our price target to Rs 2,675 (from Rs 2,845), but maintain Buy, to account for lower IT undervaluations.

nomura

L&T has digitized its entire fleet of equipment (over 11,000) resulting in productivity gains. Management is focused on green technologies with some fuel cell tie-ups announced in recent months. He continues to price L&T on a SOTP basis on FY23F and rolls his estimate to Dec-23F to arrive at a revised target price of R2,412, implying a 27% upside. The main risks are a delay in economic recovery, a sharp increase in the cost of raw materials such as steel and cement, and an increase in working capital.

JP Morgan

The brokerage has lowered its price target on the stock to Rs 2,160 (from Rs 2,300) as it believes the long-awaited recovery in growth as well as muted orders could weigh on the stock in the short term . However, he maintained his “overweight” position on the company given the long-term benefits of free cash potential and strategic initiatives.

Swiss credit

Credit Suisse has revised L&T EPS estimates for the financial year 22/23/24 to Rs 68/93/114 from Rs 77/99/119. It indicates that the potential upside could come from lower interest charges, asset sales/restructuring, pro-cyclical pull on inflows, revenue and margin.

City

The brokerage believes L&T shares are attractively priced and could rise further as the third quarter showed a healthy order environment, as well as the ability to earn orders. The brokerage maintained a buy rating with a target price of Rs 2,460.

Sharekhan

A strong increase in the order outlook for Q4FY22 as well as the maintenance of the execution, order intake, operating profit margin (OPM) and working capital forecast for FY22 are the main positive elements of the T3FY22 results. The international outlook looks promising with a recovery in crude oil prices. In the longer term, L&T remains at the forefront to leverage the Atmanirbhar Bharat program with its diversified businesses in sectors such as defence, infrastructure, heavy engineering and IT.

The company remains the best indicator of domestic capital spending and an improving business environment. We maintain a buy rating on the stock with a revised price target of Rs 2,270 taking into account the upward revised valuation of its main IT&ES subsidiaries and a favorable valuation of the core business.

Kotak Institutional Stocks

He was comforted by the main business PAT of 9 million exceeding pre-Covid levels, with the order book 11% above pre-Covid levels and the highest order pipeline ever for the fourth trimester. Improving ridership and the refinancing of Hyderabad Metro’s debt have bolstered prospects for improved business returns in the short to medium term, with L&T remaining a sore spot. The brokerage cut core business estimates by 4% and broadly kept its 2,450 rupees on the higher value of IT business and progress.

Motilal Oswal Financial Services

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

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

Antique brokerage

L&T plans to operate new businesses such as Photovoltaic Solar Modules (requested for a PLI license), Green Hydrogen (concluded in a Memorandum of Understanding with HydrogenPro AS for the manufacture of electrolysers) and Edutech to ensure that it remains ahead of the curve with next-gen business. It remains positive on the company’s long-term outlook and maintains the buy rating on the stock with an increased target of Rs 2,420.

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