L&T Shares Rise As Brokerages Cheer Healthy Order Book, Execution
Here's what brokerages made of L&T's second-quarter results:
Larsen & Toubro Ltd. emerged as the second-best performer on the Nifty 50 after analysts remained optimistic on the country’s largest engineering-to-construction company, citing healthy order pipeline, execution capabilities, and improving margin.
The company’s revenue and net profit jumped sequentially in the quarter ended September. Its operating margin beat estimates.
L&T expects growth in order inflow to be in low-to-mid teens in fiscal 2022.
Separately, the construction arm of the company secured a large order from the Central Public Works Department to construct common central secretariat integrated buildings in New Delhi. The company defines ‘large’ orders as those between Rs 2,500 crore and Rs 5,000 crore in contract value.
Shares of L&T gained as much as 4.3%, the most in at least 15 weeks, to Rs 1,862 apiece in early trade on Thursday. Trading volume was five times the average for this time of the day.
Of the 43 analysts tracking the company, 41 recommend a 'buy', while one each suggests a 'hold' and 'sell', according to Bloomberg data. The average of 12-month price targets implies an upside of 12.6%.
Here's what brokerages made of L&T's second-quarter results:
Dolat Capital
Retains ‘buy’ with a target price of Rs 2,196 apiece, implying a potential upside of 23%.
Infra segment margin at 8.3% (up 190 basis points YoY) was 110 basis points ahead of estimate, which reflects L&T’s apt capabilities to tackle commodity headwinds via sustainable cost efficiencies.
Ramp-up in execution would be swift in the second half with labour availability having come back to desired levels in October.
Healthy execution, core margin expansion, prudent capital allocation and improving return ratios should drive 20% earnings CAGR over FY21‐24.
Motilal Oswal
Maintains 'buy', raises target price to Rs 2,175 from Rs 2,080 apiece, implying a potential upside of 23%.
Robust operating performance, guidance remains unchanged. Domestic ordering making gradual comeback, while international ordering remains strong.
International prospects are looking robust across segments, including hydrocarbon, power T&D, water, among others, thanks to higher oil prices. Domestic E&C order inflows were disappointing with the first half order inflows remaining at 55% of first half of FY20 levels.
L&T rightly prioritised balance sheet strength over growth during the second Covid-19 wave. Labour availability no longer poses a challenge, and execution is expected to improve from hereon as construction activity picks up post monsoon.
L&T is poised for a strong earnings growth, if and when the order inflow gains momentum. The company has some more asset monetisation opportunities to capitalise on, including the sale of Nabha Power, a stake sale in L&T IDPL, and monetisation of the Hyderabad Metro.
L&T remains the best play on the capex cycle in India.
Emkay Financial
Maintains 'buy', raises target price to Rs 2,200 from Rs 2,000, implying a potential upside of 23.3%.
Although awarding activity has come down (22% YoY) due to the pandemic impact and slower disbursals from the central government, tendering activity remains stronger than ever.
Despite commodity inflation, better overhead costs recovery and various measures, such as digital initiatives, value engineering and process optimization, altogether drove core Ebitda margin improvement.
CLSA
Maintains 'buy' with a target price of Rs 2,250 apiece, implying a potential upside of 26%.
The key message from L&T’s Q2 was that finally, large hydrocarbon orders have arrived to boost order inflow growth to 50% year-on-year and a third consecutive infrastructure-segment margin beat (up 182 basis points year-on-year) despite materials inflation validating FY22 guidance of flat margins.
Slow infrastructure-segment execution due to labour issues was a key weak spot. Management expects a second half execution pickup with a solid $44 billion book.
Other good news was that ESG-compliant services contributed 56% to recurring profit after tax. FY22 guidance is realistic at low-to-mid-teens year-on-year growth in inflow and execution with a flat margin.
Sees the stock as inexpensive, trading at the average engineering and construction PE when the capex cycle may be on the cusp of an upturn.
Macquarie
Maintains 'outperform' with a target price of Rs 2,140, implying a potential upside of 19.3%.
Large order win in hydrocarbon compensated for delays in infra order awards despite good tendering activity in 2Q; prospects pipeline up 11%.
Believes that L&T’s focus on return on equity improvement from hereon will bring about the rerating of core-EPC business.
Key price catalysts could be improvement in pace of tender awards and progress on divestments.
The +19% rally in L&T stock since June-end reflects the valuation of listed subsidiaries and core EPC business has not yet received its well-deserved rerating despite a robust order book and profitability.
Credit Suisse
Maintains 'outperform' and target price of Rs 2,200 apiece implying a potential upside of 23.4%.
Strong results with strong inflows and improved margins in a tough time; pro-cyclically poised for strong traction on multiple parameters.
Execution was held back by cyclone in Gujarat and Maharashtra, excessive rains, and some residual Covid-19 issues. Execution can be caught up on later and is not a missed opportunity.
L&T has managed to improve margins despite a tough commodity price environment as well as lack of meaningful operating leverage. Margins have an upside as pricing power improves, spike in commodities gets absorbed and operating leverage kicks in.
Its rating reflects its view on stock price performance relative to market over the next 12 months, based on sedate domestic inflows and possibly slowing execution, a steady Middle East, macro-driven working capital issues combined with median level valuations.
Jefferies
Maintains 'buy', raises target price to Rs 2,405 from Rs 2,105 apiece, implying a potential upside of 34%.
Management reiterated their commitment to reducing debt, creating shareholder value through dividends, and reducing cash calls outside the core. Private sector capital expenditure uptick prospects were referred to as a distinct possibility.
L&T recently forayed into the online education space, which could be a medium-term value creator. Project Lakshya, L&T’s next five-year strategic plan, should be unveiled at end-FY22E.
L&T is on a re-rating path as it continues to walk the talk on prudent capital allocation, and with capital expenditure showing recovery trends.
Key risks include management not following prudent capital allocation and government infra spend not growing from pre-Covid levels.