Street positive on Larsen & Toubro despite near-term concerns

Larsen & Toubro (L&T) ended the financial year 2024-25 (FY25) on a strong note. The engineering and construction (E&C) major reported a 20 per cent growth in orders year-on-year (Y-o-Y) and 19 per cent Y-o-Y rise in revenues in the core E&C segments.

 

The prospect pipeline jumped 57 per cent Y-o-Y to ₹19 trillion due to international prospects.

 

L&T is optimistic about the GCC region for renewable, clean energy and transmission projects.

 

In Q4FY25, consolidated revenue stood at ₹74,400 crore, with Ebitda at ₹ 8,200 crore and PAT of ₹5,100 crore, a Y-o-Y growth of 11 per cent, 13 per cent and 19 per cent respectively.

 

In the core E&C business, FY25 order inflows came in much above estimate at ₹2.89 trillion, up 20 per cent Y-o-Y. Domestic order inflow was down by 14 per cent Y-o-Y in FY25, while international order inflow was up by 54 per cent Y-o-Y. This resulted in a core order book of ₹5.8 trillion, up 21 per cent Y-o-Y. Core E&C revenue came in at ₹1.9 trillion, up 19 per cent Y-o-Y.

 

International execution surged by 54 per cent Y-o-Y.

 

For FY25, core business Ebitda margin stood flat Y-o-Y at 8.3 per cent. During FY25, infrastructure segment margin stood at 6.4 per cent, up 20bp Y-o-Y, driven by execution cost savings. Energy segment margin stood at 8.4 per cent in FY25 versus 10 per cent in FY24, with some projects yet to reach margin recognition threshold. 

 

Hi-tech manufacturing margin stood at 17.3 per cent against 16.3 per cent in FY24. In the ‘Others’ segment, Ebitda margin was at 29.2 per cent vs. 21.3 per cent in FY24, mainly driven by realty business.

 

Prospect pipeline for FY26 stands at ₹19 trillion, up 57 per cent Y-o-Y, due to increase in infrastructure and energy segment prospects.

 

The domestic prospect pipeline is flat Y-o-Y at ₹7 trillion, while international stands at ₹12 trillion.

 

The company has a success rate of 20-25 per cent in the prospect pipeline and expects this to improve in the future. 

 

Order inflows from the domestic segment were down 15 per cent Y-o-Y. L&T is selectively bidding for domestic projects across infrastructure, heavy civil, B&F (buildings & factories), metals and mining, and thermal power.

 

It is going slow on water-related projects, which have seen delayed payments. International orders form 46 per cent of L&T’s total order book, and the GCC region accounts for 81 per cent of its international order book.

 

L&T is not concerned about a reduction in capex spending as funding lines for these projects are strong and L&T is working with best-in-class clients.

 

L&T achieved good net working capital (NWC) of 11 per cent of sales for the core E&C division. Core E&C return on equity (RoE) also improved by 140bp to 16.3 per cent in FY25, aided by improved execution of international projects, where NWC is much lower.

 

For FY26, L&T’s management provided guidance of 10 per cent growth in order inflows, factoring in a conservative outlook. Revenue is expected to grow by 15 per cent Y-o-Y, while core E&C margin is targeted to be at 8.5 per cent. The company expects to maintain a NWC-to-revenue ratio of 12 per cent.

 

While core E&C is robust, investors are likely to factor in a reduction in estimates and valuation for IT subsidiaries. This could result in lower fair value and target prices.

 

Given a global slowdown and possible fall in energy prices, there may be a slowdown in order inflows in GCC and delays in the completion of mega and ultra-mega projects and consequently, an increase in working capital. However, analysts are generally positive on the stock despite these concerns.

 

According to Bloomberg, 23 of the 26 analysts polled in May were bullish, 2 were neutral and one was bearish. Their average one-year target price is ₹3,922 for the stock that closed 3.8 per cent higher on Friday at ₹3,445.70 on the BSE even as benchmark indices closed over 1 per cent down.