L&T Q3 Results Review: Strong Order Pipeline To Boost Growth Outlook

Brokerages raised their estimates and target price of Larsen & Toubro Ltd. after its stellar third quarter performance, citing that a strong order pipeline in addressable markets will boost earnings in the coming quarters.

Motilal Oswal Securities:

• L&T’s 3QFY24 revenue beat our estimates, but lower-than-expected margins led to a miss in PAT.

• L&T has been benefiting from strong inflows, particularly from international geographies, and has received orders worth Rs 1.8 lakh crore during 9MFY24 for its core E&C segment.

• The company has maintained its focus on mega and ultra-mega projects and has been able to improve working capital YoY to 16.6% of sales.

• Margins are still below guidance owing to legacy order execution and new orders still not achieving the margin recognition threshold.

• The brokerage expects L&T to continue to benefit from the strong addressable market in both India and international locations.

• Revised estimates to bake in improved inflows and lower margins.

• Target Price increased to Rs 4,200 from the current market price of Rs 3,633 based on the SOTP methodology, valuing the core business at P/E of 28 times March 26E EPS, and a 25% holding company discount for subsidiaries.

• Higher multiples take into account the continuously improving prospect pipeline and improvements in net working capital and return on equity (RoE), despite margins being lower than guidance.

• The brokerage has maintained a ‘buy’ on the stock.

Citi Research:

• L&T reported strong project and manufacturing order inflow and P&M revenue/EBITDA growth in Q3 FY24.

• Further, the pipeline remains healthy due to the increase in hydrocarbon prospects.

• P&M/infrastructure margins were in line with muted expectations.

• Net working capital (NWC) and return on invested capital (RoICs) in core P&M businesses remain at very healthy levels, and as a result, consolidated RoE has improved to 15.2% on a trailing 12-month basis.

• Domestic order inflow was weak in Q3FY24. Near-term, Q4FY24/Q1FY25 may face some more headwinds in awards and execution due to the pre-election season in India.

• Margins should improve sequentially during FY25 as new projects start contributing.

• L&T remains well-placed to benefit from growth in capital expenditure in India and ME.

• L&T remains our top pick from a medium-term perspective.

Key Takeaways:

1.       Hyderabad metro: average ridership/day declined to 4.4 lakh passengers per day in Q3 FY24 vs. 4.62 lakh passengers a day in Q2 FY24. Although it was higher on a YoY basis.

Ridership fell sequentially due to longer holidays and the launch of a free bus scheme for women by the state government.

Hyderabad Metro loss narrowed to Rs 254 crore in Q3 FY24 vs Rs 332 crore a year ago.

The metro has received around Rs 900 crore of state government support to date, including Rs 150 crore in Q3 FY24.

2.       Out of L&T's total order book, the fixed price portion is 42-43%, and the rest has variable pricing.

3.       Around 80% of L&T's Middle East orders are from Saudi Arabia, and 92% of the company’s international orders are from the Middle East.