PL Stock Report: Larsen & Toubro (LT IN) - Q2FY24 Result Update – Healthy performance; orders prospects strong - BUY

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

Rating: BUY | CMP: Rs2,929 | TP: Rs3,437

Q2FY24 Result Update – Healthy performance; orders prospects strong

Quick Pointers:

§ Near term tender prospect stands strong at Rs8.8trn, up 39% YoY.

§ Two large orders win in hydrocarbon segment drives order inflow growth of 71.7% YoY to Rs891.5bn.

Larsen & Toubro (LT) reported healthy set of quarterly performance with consolidated revenue growth of ~19.3% YoY, while margins contracted 41bps YoY, due to business mix and legacy project reaching completion. NWC to sales improved to 16.7% vs 19.8% in H2FY23, owing to strong cash collections with FY24 guidance maintained at 16-18%. Tender prospects from Infrastructure stands at Rs5.06trn and Hydrocarbon Rs2.9trn for H2FY24. Hyderabad metro reported profit of Rs2.4bn vs loss of Rs3.3bn in Q2FY23, owing to increased ridership and TOD monetization. Management is confident to surpass its earlier guidance on order inflows and revenue growth of 10-12% and 12-15% respectively for FY24. Management revised its core margin guidance to 8.5%-9% from 9% guided earlier, factoring in multiple jobs not reaching margin recognition threshold in FY24.

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 30.3x/25.7x/22.1x FY24/25/26E. We revise our FY24/25E by 6.1%/5% factoring in improved performance of Hyderabad Metro, strong order book and tender prospects. We roll forward to Sep’25E and maintain ‘Buy’ rating on stock with revised TP of Rs3,437(Rs3,302), valuing core business at PE of 24x Sep’25E.

Higher other income and healthy operating performance drives PAT: Consolidated sales reported strong growth of 19.3% YoY to ~Rs510.2bn, (PLe ~Rs500bn), driven by revenue growth across segment except financial services. EBITDA grew 15.1% YoY to Rs56.3bn (PLe ~Rs54bn). while EBITDA margins declined 41bps YoY to 10.2%, impacted by lower gross margins (39.1% in Q2FY24 vs 40.9% in Q2FY23) despite better absorption of fixed overheads. Adj. PAT grew ~44.6% YoY to Rs24.9bn (PLe Rs26.5bn), driven by higher other income (up ~53.4% YoY to Rs11.3bn. While on standalone basis revenues grew 9.2% YoY to Rs281.5bn. EBITDA remain broadly flat at Rs19.2bn, while margins declined by 58bps YoY to 6.8%. Adj. PAT grew 28.5% YoY to Rs27.1bn,

Strong order book position of Rs4.5trn: Consolidated order inflows came at Rs891.5bn in Q2FY24 up 71.7% YoY, driven by substantial order win in Energy Projects segment (Rs401bn) and Infrastructure (up 12% YoY to ~Rs28bn). Order book stands strong at ~Rs4.5trn (2.2x TTM revenue), up 21% YoY as on 2QFY23.

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