L&T gains over 2%, hits record high on hopes of strong order inflows

L&T would be a key beneficiary of the government's infrastructure thrust and capex revival in private sectors.

Shares of Larsen & Toubro (L&T) hit a record high of Rs 2,361.90, up 2.5 per cent on the BSE in Friday’s trade on expectations that the civil construction major will report strong order inflows with healthy execution in March quarter (Q4FY23).

The stock surpassed its previous high of Rs 2,329.90, touched on April 11, 2023. In past one month, it has rallied 10 per cent, as compared to 5.5 per cent rise in the S&P BSE Sensex. Further, in past one year, the market price of L&T has surged 37 per cent, as against 5.7 per cent gain in the benchmark index.

The board of directors of L&T are scheduled to meet on May 10, 2023, to consider and approve the audited consolidated and standalone financial results of the company for the year ended March 31, 2023 and to recommend dividend, if any.

L&T is India’s largest engineering & construction (E&C) company, with interest in EPC projects, hi-tech manufacturing and services. The company primarily operates in infrastructure, heavy engineering, defence engineering, power, hydrocarbon, services business segments.

As part of its five-year strategic plan ‘Lakshya 26’ the company is looking to divest its investment in non-core areas, which includes road concessions and power business and minimising its stake in Hyderabad Metro. Under the strategic plan, the company plans to focus on green energy, cell and battery manufacturing, the development of data centres, tech education, and B2B e-commerce in the coming years.

By virtue of its leadership and diversified offerings in the EPC (engineering, procurement, and contract) domain, analysts believe that the company would be a key beneficiary of the government’s infrastructure thrust and capex revival in private sectors.

Moreover, increased investments in infrastructure and hydrocarbon in the Gulf Cooperation Council (GCC) region would also provide diverse opportunities.

During Q4FY23E, EPC order inflows announced by L&T are in the range of around Rs 20,000-31,500 crore (ex-services segment) across railway, hydrocarbon, power T&D, water treatment, heavy engineering, buildings & factories segments indicating strong order inflows for the quarter amid challenging environment globally.

Analysts at ICICI Securities expects strong execution pick-up YoY. "In our view, working capital and cash flow management will be key monitorables. Consequently, we expect standalone revenue to grow 12.1 per cent to Rs 41,971.5 crore. EBITDA is expected to grow 12.9 per cent to Rs 4,369.2 crore with margins expected at 10.4 per cent owing to better execution. Adjusted PAT (ex-E&A) expected to grow 16.9 per cent to Rs 3,392.7 crore on account of operating leverage and lower finance costs", the brokerage firm said in result preview.

L&T as the best proxy for India capex that can compound EBITDA at 12–15 per cent given healthy order book (>3.6x FY22 sales); strong pipeline of Rs 4.9 trillion (~50 per cent tender-to-award ratio); accelerated execution; and stable EBITDA margin of ~9 per cent, said analysts at Nuvama Institutional Equities.

“We factor in order intake and sales guidance of 12–15 per cent at core EBITDA margin of 9–9.5 per cent (five-year average). All in all, we find L&T an attractive steady compounder with potential triggers for margin expansion/re-rating (CMP at 22x P/E versus long-term average PE of 22x),” the brokerage firm said. It retains ‘BUY/SO’ with a target price of Rs 2,700 (earlier Rs 2,450).

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