Larsen & Toubro Q2 Results Review: Strong Order Pipeline Gives Revenue Visibility

Larsen & Toubro Ltd. is expected to benefit from the large order pipeline as it gives comfortable revenue visibility, according to analysts.

Jefferies:

• Maintains a 'buy' rating with a revised price target of Rs 3,400, against the current market price of Rs 2,929.

• The Q2 FY24 Ebitda was 4% lower than expected.

• Management expects to do better than the FY24E order flow/revenue guidance, but margin was revised to 8.5-9% from 9% earlier.

• Jefferies lowered its Ebitda estimates for FY24-26 by 2-3%, to factor the margin guidance change, but if projects reach margin recognition levels earlier, this could surprise.

• Prospect pipeline is up 39% YoY.

• Railways is seeing strong traction particularly in electrification, high speed rail and metro.

• Private sector has moved up to 20-22% of prospect pipeline vs 18-20% run-rate YoY, driven by metals and buildings and factories.

• Middle East spend is seeing higher growth in hydrocarbon, though green infra is also a focus.

• International Engineering and Construction revenues rose 92% YoY and likely reason for 74 bps lower YoY Ebitda margins.

• L&T’s order book is Rs 4.5 lakh crore, 3.6 times FY23 E&C sales, and gives comfortable revenue visibility for FY24E-26E.

• Jefferies raised its FY24E revenue growth estimates to 17% from 12-15%, based on strong H1 growth by 25% YoY.

• Its order flow assumptions for the next fiscal year are 15% growth, compared to last year, which is higher than the 10-12% guidance.

• Both of L&T’s key geographies, India and Middle East, are seeing capex traction.

Kotak Institutional Equities

• L&T's second quarter was strong on ordering and execution, but weak on margin.

• L&T reported a healthy in-line revenue print for the core engineering and construction business that was up 24% YoY, with a sharp miss in Ebitda in Q2.

• The weakness in margin reflects commodity headwinds, faster execution of legacy projects and a large proportion of projects yet to reach the margin threshold.

• Order inflows were expectedly strong, almost two times YoY, as the company booked both the ultra-mega deals recently won in the hydrocarbon space in Saudi.

• The order backlog grew 22% YoY. The order pipeline for H2 FY24 was up 42% yoy.

• Working capital improved by 310 basis points YoY to 16.7%, boosted by a growing share of overseas business, which accounted for a dominant share of around 24% YoY growth in revenue.

• L&T expects to exceed 12% ordering growth (Kotak estimate: 25%) and 15% revenue growth (Kotak estimate: 17%).

• However, L&Ts decision to reduce its margin guidance to 8.5-9% from 9%, despite an increase in revenue growth, reflects limited gains for operating leverage, brokerage said.

• L&T has kept the guidance open ended to account for a change in seasonality (impact of the election), large share of mega/ultra-mega orders in the pipeline that can slip into the next year and geo-political externalities.

• Cut in margin guidance is more a function of deferral in new orders getting to the margin threshold.

• Note that a large part of the revenue growth reflects the fast execution of old orders by L&T.

• The brokerage has retained its margin estimates and 21 times multiple for core E&C.

• Kotak is cautious, as the stock prices in 27 times two-year forward core E&C EPS for the next 10% of upside.

• According to the brokerage this appears aggressive for a business with already high share of Saudi projects, exposed to the risk of government spending moderating in the next two years, lacking operating leverage and having a track record of volatile margin.

Prabhudas Lilladher

• L&T is well-placed to benefit in long run with a strong tender prospect; better order conversion in domestic market; significant traction in hydrocarbon and renewable energy orders from international markets like Saudi Arabia, and the expected uptick in private capex in domestic market.

• The stock is currently trading at price-to-earning of 30.3 times/25.7 times/22.1 times FY24/25/26E.

• Brokerage has revised L&T's FY24/25E by 6.1%/5%, factoring in improved performance of Hyderabad metro, strong order book and tender prospects.

• The brokerage has rolled forward to September-25E and maintained ‘buy’ rating on stock.

• Target price has been set at Rs 3,437, valuing core business at PE of 24 times Sept-25E.

Shares of the company fell as much as 1.98%, before paring loss to trade 1% lower at 11:33 a.m., compared to a 0.21% decline in the NSE Nifty 50.

The stock has fallen 39.33% on a year-to-date basis. Total traded volume so far in the day stood at 3.7 times its 30-day average. The relative strength index was at 41.6.

Of the 37 analysts tracking the company, 34 maintain a 'buy', one recommends a 'hold' and two suggest a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 12.5%.