L&T wins significant contracts for various businesses; stock up 3%

Shares of Larsen & Toubro (L&T) hit a record high of Rs 1,684.80, up 3 per cent on the BSE in intra-day trade on Monday, after the company announced L&T Construction, the construction arm of the company has bagged a slew of orders in India and abroad for its various businesses. According to L&T's classification, the valuation of the 'significant' lies between Rs 1,000 crore to Rs 2,500 crore.

The stock of engineering & construction (E&C) major surpassed its previous high of Rs 1,676.70 touched on August 16, 2021. In the past one week, L&T stock has outperformed the market by gaining 6.6 per cent, as compared to 2 per cent rise in the S&P BSE Sensex.

L&T’s buildings & factories business has secured an order to construct multilevel parking and advocates chamber for the Hon'ble High Court at Allahabad with an approximate built-up area of 20 lakh square feet. The power transmission & distribution business has bagged an order for the turnkey construction of a substation in Saudi Arabia, while the smart world & communication business has bagged yet another smart city project.

Analysts at Motilal Oswal Financial Services have raised the target price of the stock to Rs 1,950, largely driven by mark-to-market (MTM) of listed information technology (IT) subsidiaries.

"L&T’s core E&C business remains best placed to benefit from any capex upcycle, supported by its leaner asset-light business model and diversified segments. Therefore, even as the Buildings and Power segments were weaker in FY21, this was largely offset by strong orders from the international Power Transmission & Distribution (T&D) and Hydrocarbons segments. L&T’s capability to win large ticket size projects, such as airports and high-speed rail (HSR), has been remarkable and has compensated for its exit from the roads sector," analysts at Motilal Oswal said in a recent report.

Multiple catalysts

Over the next two years, the brokerage sees multiple catalysts emerging for L&T, including asset monetization for Hyderabad Metro and Nabha Power, free cash generation (FCF) generation of USD1.5–2.0 billion per annum in the core business, an improvement in order inflows prior to the elections, and improved execution, aided by a better working capital cycle – as the government focuses on capex towards economic growth and job creation. "If the macro improves, the strong FCF generation should enable L&T to hike dividend payouts as there is hardly any capex requirement beyond the maintenance capex," the brokerage firm said.

Those at Sharekhan believe L&T’s should see improvement in execution along with stable margins in FY2022 as the domestic economy evolves out of the second wave of COVID-19 while major developed economies have started to see strong recovery.

"L&T continued to preserve strong cash balance of Rs 45,100 crore (Rs 47,300 crore as on FY2021). For the long term, L&T remains at the forefront to reap benefits from the AtmaNirbhar Bharat Scheme with its diversified businesses across sectors such as defence, infrastructure, heavy engineering and IT. The company remains the best proxy for domestic capex and its improving business environments, the brokerage firm said and maintain a Buy on L&T with a revised price target of Rs 1900," they wrote in a recent note.