L&T Q1FY25 analysis: Analysts eye order execution post strong June quarter

Shares of Larsen and Toubro rose 2.46 per cent at Rs 3606.25 per share on the BSE in Thursday's intraday trade

L&T shares jump after Q1FY25 results: Shares of engineering, procurement and construction company, Larsen and Toubro rose 2.46 per cent at Rs 3606.25 per share on the BSE in Thursday’s intraday trade. This came after the company beat street estimates in the April-June quarter of financial year 2024-25 (Q1FY25) and stayed with its double digit growth estimated for FY25. 

L&T on Wednesday recorded a 11.7 per cent year on year growth in its net profits to Rs 2,786 crore for the Q1FY25.The company’s topline also increased by 15.1 per cent year on year (Y-o-Y) to Rs 55,210 crore

Further, the management stayed with its earlier guidance of 15 per cent Y-o-Y growth target for FY25, with a 10 per cent rise in order inflow compared to the previous year, and core margins expected to be maintained at 8.25 per cent.

L&T’s Q1FY25 performance was 3 per cent ahead of Motilal Oswal’s estimates on both revenue and PAT. The brokerage said the company’s core engineering and construction (E&C) revenue growth was largely driven by sharp improvement in overseas revenue, while domestic revenue was flat Y-o-Y due to elections, labour shortage and heat waves.

In a seasonally weak quarter, L&T managed to post a 18 per cent Y-o-Y growth in its core E&C revenues and earnings before interest, tax, depreciation and amortisation growth of 21 per cent, the brokerage added. 

However, analysts at Nuvama noted that despite core revenue growth, the operating profit margin (OPM) stayed marginally higher at 7.6 per cent, resulting in a mixed bag performance. Though, the management hopes to improve core OPM as they retained 8.2 per cent guidance for FY25.

Prospects pipeline declined by 10  per cent year-on-year for the first nine months of FY25 as hydrocarbon business witnessed few projects being shelved while others got delayed or won by competition in the Middle East, analysts at Nuvama added. They, however, noted that EPC opportunities for L&T persists in the Middle East on several fronts with an upcoming $50–60 billion oil to chemicals market. 

Analysts at Kotak also said that while the overall deal inflow grew by 8 per cent Y-o-Y in Q1, all driven by overseas. However, the same has led to the usage of 25 per cent of the full-year order pipeline in a seasonally weak quarter.  The remaining Rs 9 trillion order pipeline for the remainder of the year is down 10 per cent Y-o-Y.

As of June 2024, L&T's outstanding order book stood at Rs 4.90 trillion, with 38 per cent attributed to international projects. New order wins totaled Rs 70,936 crore, up 8 per cent year-on-year. 

“We believe L&T faces headwinds of a large OB base, high mix of fixed price contracts exposed to commodity risk and execution and margin challenges. Retain ‘Hold’ as we are revising FY25-26 EPS by -2 per cent to -3 per cent and rolling forward to FY27 EPS, while we are trimming target multiple to 25 times from 27 times for a target price of Rs 4,040 from earlier Rs 4,000,” Subhadip Mitra Vijay Bhasin Vikram Datwani of Nuvama wrote in a report. 

Echoing a similar sentiment, analysts at Kotak said L&Ts results were strong on execution and weak on margins. Adding that order inflows were healthy, but saw depletion in the order pipeline largely linked to the low hit rate and the deferment of orders in Saudi Arabia. 

The brokerage cut its core E&C estimates by 2-4 per cent for FY25, due to 3 per cent lower order inflow growth for FY2025 (7 per cent versus 10 per cent guidance), stable margin assumptions and lower other income and a higher tax rate at the consolidated level. 

Analysts at Kotak gave a ‘Sell’ call to L&T with an increased fair value of Rs 3,150 from earlier 3,050 as its core E&C business trades at an expensive 35 times its one-year forward earnings. 

In contrast, those at Motilal Oswal maintained their confidence in the EPC major, and maintained ‘Buy’ on the stocks with a target price of Rs 4,150, valued at 30 times price to earnings on June 2026 EPS and 25 per cent holding company discount for subsidiaries. 

"With strong international order inflows in FY24, we expect execution to remain strong. Hence, we see a possibility of LT’s

revenue growth outperforming its guidance of 15 per cent for FY25 despite a guidance of flat margins on a Y-o-Y basis," the brokerage further noted.

Global brokerages also remained optimistic on L&T with Citi maintaining its ‘Buy’ call with a target price of Rs 4,376 and Bernstein retaining ‘Outperform’ with a target price of Rs 3,800. 

At 11:23 AM; the shares of the company were trading 2.43 per cent higher at Rs 3604.90 per share. In comparison, the BSE Sensex slipped 0.48 per cent at 79761 levels.