L&T To Meet FY23 Orderbook Guidance Despite Lower Q4 Inflow, Says A Bullish Jefferies

Indian conglomerate Larsen & Toubro Ltd. will be able to meet its fiscal 2023 orderbook guidance despite a lower order inflow in January-March, according to Jefferies.

Jefferies expects the company's order inflow in the fourth quarter to decline 9% year-on-year to Rs 67,518 crore, it said in its investor note. This is in comparison to the Rs 73,941 crore reported a year ago.

However, the engineering conglomerate, which clocked a 30% year-on-year growth in the first nine months of fiscal 2023, should be able to "comfortably meet the higher end of its 12–15% year-on-year FY23 guidance," Jefferies added.

Jefferies kept a 'buy' call on the stock and a price target of Rs 2,650, implying a 22% upside.

The brokerage added that the valuations point to a re-rating in historical context.

The shares of the company closed 0.79% higher at Rs 2,274.75 apiece on Thursday, compared with a 0.24% gain in the benchmark Nifty 50.

Of the 45 analysts tracking the stock, 44 maintained a 'buy,' and one analyst recommended a 'sell,' according to Bloomberg. The average 12-month consensus price target implies a potential upside of 6.6%.

In its third-quarter earnings call, Larsen & Toubro's management said that private sector capex is picking up speed. In particular, buildings, factories, and ferrous metals are seeing growth, which is reflected in the order flow.

This makes Jefferies believe that the company's power T&D and railways are the two areas with a scope for positive surprises.

This is because renewable energy generation and railways capex focus are likely to pick up, the brokerage added.

"We believe L&T is in a sweet spot where both domestic and Middle East businesses have a good outlook," it said.

Margins May Positively Surprise

Higher commodity prices easing off and revenue growth ahead give Jefferies confidence that Larsen & Toubro's core engineering and construction margins have bottomed. E&C margins in the nine months of fiscal 2023 are down 40 bps to 8.4%.

Margins could positively surprise in fiscal 2024, the brokerage added. It expects core E&C Ebitda to rise at a 22% CAGR over fiscal 2022 through 2025 vs. 16% in fiscal 2015–19, when it traded at a 12 times EV/Ebitda ratio, Jefferies said.

Defence exposure and red flags from ESG rating agencies on it limit funds, particularly from the UK, and Europe owning L&T, said Jefferies.

"As order flow and execution outlook remain healthy, L&T could see an additional re-rating on the ESG leg if more funds get an exemption and can own the name," it added.