Analysts bullish on L&T post good operational show, strong balance sheet

27 of 28 analysts polled by Bloomberg have an add, outperform recommendation

Almost all brokerages remain bullish on Larsen & Toubro (L&T), citing India’s largest engineering and construction (E&C) company’s stronger balance sheet, improved operational performance for the March quarter and a healthy outlook, amidst the second Covid-19 wave.

"While Covid 2.0 has brought on similar challenges as last year, construction activity has been ongoing unlike last year and hence, the impact should be lower than last time," said analysts at Motilal Oswal Securities, which has maintained a buy call.

L&T’s balance sheet has strengthened, as its net debt/equity (including minorities and adjusted for current investments) improved to 1x from 1.5x in FY20, driven by completion of the sale of the E&A business, and working capital cycle improvement to 22.3 per cent of sales from 23.7 per cent, the brokerage said.

The order book is strong at Rs 3.3 trillion, up 8 per cent year-on-year, with order book/revenue ratio of 3.5x being the highest in many years. However, the mix may change going ahead.

"While FY21 inflows had a domestic skew with over 73 per cent of inflows from the domestic market, we see that changing in FY22 with international orders catching up," Bernstein said in its report.

L&T delivered a resilient operational performance with its earnings before interest, tax, depreciation and amortisation or EBITDA growing 25 per cent year-on-year in the March quarter.

"We believe L&T is well placed to ride the cyclical recovery supported by healthy ordering prospects, increased allocations for capital expenditure under the NIP (National Infrastructure Pipeline), expanded PLI (production linked incentive) scheme, technological differentiation, and global competency bolstering its leadership position," Dolat Capital said.

Alongside, though Nomura maintains a Buy on L&T, it has cut the profit after tax estimate for FY22 by 2 per cent while increasing the FY23 figure by 4 per cent to account for potential uptick in EBITDA margin on receipt of Covid-19 under-recovery claims.

"We do not expect an increase in L&T’s market share in FY22 due to liberalised bidding conditions that will likely lead to more competition. Thus, we estimate order inflow growth similar to growth in prospect base for FY22," said Nomura in its report.

While most remain bullish, a few seem cautiously positive. Centrum Broking, for instance, is among the few to have downgraded L&T stock to ‘Add’ from ‘Buy’ citing limited upside from current levels.

“L&T’s FY22 growth recovery has been partly disrupted by a strong Covid 2nd wave and resultant delays in order finalisations and execution constraints,” the brokerage said.

The order pipeline for FY22 is about Rs 9 trillion.

“Advent of Covid second wave has brought uncertainty on growth and order intake fronts in the near term; however, L&T expects the situation to normalise Q2FY22-end onwards,” noted analysts at ICICI Securities, which has maintained Buy on L&T.

These near-term concerns may have played on sentiment, given that the stock was down 2 per cent on Monday, even as leading indices were up 1.7 per cent.

Centrum, however, said, margin performance in Q4FY21 and guidance both are buoyant. There is no material change in our FY22/FY23 earnings as we had built-in only slightly better growth (18.5 per cent) than now guided with 10 per cent E&C margins versus 10.3 per cent achieved in FY21.

For now, 27 of the 28 analysts polled by Bloomberg post the results have a ‘Buy/Add/Outperform’ rating on the engineering major, with the exception of Ambit (Sell rating).

Their average target price is Rs 1,700 for the stock that closed at Rs 1,387 on the BSE.