PL Stock Report - Larsen & Toubro (LT IN) - Q1FY24 Result Update - Healthy performance, strong order prospects - BUY

Larsen & Toubro (LT IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs2,560 | TP: Rs2,955

Q1FY24 Result Update - Healthy performance, strong order prospects

Quick Pointers:

♦ 9MFY24 tender prospects stands strong at ~Rs10.1trn (up 34% YoY).

♦ Board approved share buyback amounting to Rs100bn (2.4% of equity share capital) at an offer price upto Rs3,000/shares.

Larsen & Toubro (LT) reported healthy set of quarterly performance with consolidated revenue growth of ~34% YoY, while margins contracted 86bps YoY, due to business mix and legacy project reaching completion. Margins are likely to improve from H2FY24, with legacy orders likely to be completed by Q2/Q3FY24 and new projects reaching margin recognition threshold. NWC to sales improved to 17% in Q1FY24 vs 20.6% in Q1FY23, owing to strong cash collections with FY24 guidance maintained at 16-18%. Tender prospects from infrastructure stands at Rs5.85trn, Hydrocarbon-Rs3.47trn, Power-Rs0.45trn and Hi-Tech-Rs0.29trn. Management is confident to achieve its ROE target of 18%+ by FY26, driven by strong business outlook, prudent balance sheet management and returning surplus cash to shareholders (announced Rs100bn buyback & special dividend).

We believe L&T is well-placed to benefit in long run with 1) strong tender prospects, 2) better order conversion in domestic market, 3) significant traction in hydrocarbon and 4) renewable energy orders from international markets like Saudi Arabia and expected uptick in private capex in domestic market. The stock is currently trading at PE of 29.1x/24.4x FY24/25E. Maintain ‘BUY’ rating with revised SoTP of Rs2,955 (Rs2,615 earlier), valuing core business at PE of 22x FY25E, (21x earlier), given strong revenue visibility, prudent NWC management and improving Hyderabad Metro operational performance.

Robust execution drives revenue growth of ~34% YoY: Consolidated sales reported strong growth of 33.6% YoY to ~Rs478.8bn (PLe ~Rs403bn), driven by growth across segment expect Development projects. EBITDA came in at ~Rs48.7bn (up 23.2% YoY) (PLe ~Rs45.6bn), while EBITDA margins declined 86bps YoY to 10.2%, partly aided by better absorption of fixed overheads. Gross margins declined to 38.8% in Q1FY24 vs 45.5% in Q1FY23. Adj. PAT grew ~46.5% YoY to Rs24.9bn (PLe Rs21.3bn), driven by higher other income (up ~64.9% YoY to Rs11.5bn). While on standalone basis revenues grew 33.2% YoY to Rs269bn. EBITDA grew 21.2% YoY to Rs18.7bn, while margins declined by 69bps YoY to 7%, impacted due to business mix. Adj. PAT grew 53% YoY to Rs13.9bn, aided by higher other income (up ~51% YoY to Rs8.6bn).

Strong order book position of Rs4.1trn: Order inflows came at Rs655.2bn in Q1FY24 up 56.7% YoY, driven by order wins in Infrastructure (up118% YoY to Rs400bn), Energy (up 67% YoY to ~Rs72bn). Hi-tech segment order inflow were down 70% YoY to Rs10.5bn, owing to high base across diverse segments like Rail, Renewables, Rural Water Supply, T&D, IT & Office Space and Onshore & Offshore verticals of the Hydrocarbon business. Order book stands strong at ~Rs4.1trn (2.1x TTM revenue), up 13.5% YoY as on 1QFY23.

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