L&T stock remains on analysts' hotlist despite guidance worries

The company has cut its margin guidance due to higher share of fixed-price contracts, supply chain issues, and geopolitical uncertainties

Larsen & Toubro’s (L&T’s) result in the fourth quarter of the financial year 2023-24 (Q4FY24) was ahead of estimates but the guidance included a warning about lower margins. The company reported a 15 per cent year-on-year (Y-o-Y) rise in revenues, 6 per cent growth in earnings before interest, taxation, depreciation and ammortisation (Ebitda) and 8 per cent Y-o-Y growth in profit after tax (PAT) on a consolidated basis.

The core Engineering & Construction (E&C) revenue grew 18 per cent with Ebitda up 22 per cent, and the Ebitda margin at around 9.5 per cent. It also guided for a 24 per cent Y-o-Y increase in the prospect pipeline to Rs 12 trillion and a reduction in the net working capital cycle to 12 per cent of net sales.

L&T, however, has cut its margin guidance due to a higher share of fixed-price contracts in its order book, supply chain issues, and geopolitical uncertainties. This has led to analyst downgrades for FY25 earnings for the core E&C segment, and lower revenues for subsidiaries.

L&T’s consolidated revenue grew 15 per cent Y-o-Y to Rs 67,100 crore in Q4FY24, ahead of estimates. Ebitda rose 6 per cent Y-o-Y to Rs 7,200 crore and adjusted PAT grew 8 per cent Y-o-Y to Rs 4,300 crore. Core E&C revenue increased 18 per cent Y-o-Y to Rs 50,980 crore, ahead of expectations. Margins in Q4FY24 expanded 20 basis points (bps) Y-o-Y to 9.5 per cent. Thus, core Ebitda grew 22 per cent Y-o-Y to Rs 4,860 crore. Working capital improved to 12 per cent of sales for core E&C, and RoE (return on equity) rose to 14.9 per cent from 12.2 per cent in FY23.

The order inflow in Q4FY24 stood at Rs 56,050 crore, down 8 per cent Y-o-Y, due to a 25 per cent decline in domestic orders, partly owing to ongoing elections. The total order book stood at a record Rs 4.8 trillion, up 20 per cent and about 3X trailing 12 month revenues. International orders form 38 per cent of the overall order book. Within the international segment, 92 per cent comes from West Asia due to the rise in the Gulf Cooperation Council (GCC) capex. L&T’s prospect pipeline rose 24 per cent Y-o-Y to Rs 12 trillion, owing to a sharp increase in infrastructure (at Rs 7.25 trillion, up 12 per cent Y-o-Y) and hydrocarbon (Rs 3.9 trillion, up 58 per cent Y-o-Y) prospect. However, while the company is bullish on GCC, prospects have seen some moderation.

In the domestic infrastructure pipeline, the company is eyeing projects in water, urban transport, bridges, buildings & furniture, and renewables. L&T expects a hit rate of 20-25 per cent in the domestic prospect pipeline of Rs 7.25 trillion.

For FY25, management has guided for order inflow growth of 10 per cent, revenue growth of 15 per cent, Net Working Capital (NWC) to sales of 15 per cent, and a margin of 8.25 per cent. The lower margins give it a cushion in bids for fixed-price West Asia projects or domestic renewables. Better margins could come from improved margins in infrastructure, improved inflows in high-margin defence orders, and faster claim settlements from clients.

L&T is focused on reducing working capital further through improved collections and better customer advances. Despite lower margins, the company improved RoE by 270 bps Y-o-Y to 14.9 per cent as it reduced working capital by 410 bps to 12 per cent of sales. Working capital is expected to remain at 15 per cent of sales, as the project mix includes more projects with low NWC.  Majority of analysts remain bullish on L&T but the stock dropped 5.6 per cent to Rs 3,276.15 on Thursday on the BSE, due to the guidance. According to Bloomberg, 20 of the 23 analysts polled post results are bullish on the stock; two have ‘sell’ and one has a ‘hold’ rating. Their average one-year target price is Rs 3,831.