Street cheers L&T's strong Q1, share buyback move; stock jumps by 3.5%

Majority of analysts bullish on the stock, but average target price indicates positives are nearly priced in

Larsen & Toubro (L&T) declared excellent results for the June quarter of the 2023-24 financial year (Q1FY24) while also throwing in a special dividend and a buyback scheme. As a result, the stock jumped 3.5 per cent.

For the infrastructure major, consolidated revenue in Q1 rose to Rs. 47,782 crore, up 33.6 per cent year-on-year (YoY) and down 18 per cent quarter-on-quarter (QoQ). Earnings before interest, tax, depreciation, and amortization (Ebitda) stood at Rs. 4,868 crore, up 23 per cent YoY. The profit after tax (PAT) was at Rs. 3,116 crore (up 36 per cent YoY) and adjusted PAT was at Rs. 2,493 crore, up 46 per cent YoY. The Ebitda margin was at 10.2 per cent, down from 11 per cent in Q1FY23.

The Ebitda margin declined due to cost pressure from legacy projects. The key net working capital (NWC)/revenue ratio improved to 17 per cent versus 20.6 per cent in Q1FY23. Segment contribution to revenue was 46 per cent from infrastructure, 32 per cent from services, 14 per cent from energy, and 4 per cent each from hi-tech and others (consisting of realty, industrial valves, construction equipment & mining machinery and rubber processing machinery). About 40 per cent of the revenue was from international projects.

The company maintained its guidance for FY24, at 12-15 per cent YoY revenue growth, with 10-12 per cent YoY order inflow growth, NWC/revenue ratio of 16-18 per cent and Ebitda margin of 9 per cent for the projects & manufacturing business. Despite robust growth in orders, L&T remains cautious in guiding, owing to lumpiness on account of seasonal impact of monsoons and potential holdups or truncation of work in FY24 due to elections. Hence, guidance is much lower than prospects.

The order book reached an all-time high of Rs. 4.13 trillion (up 14 per cent YoY), with inflow of orders worth Rs. 65,500 crore (up 57 per cent YoY), and international orders comprising 42 per cent of the inflow and 29 per cent of the entire book. This growth was driven by projects and manufacturing, with 79 per cent YoY growth, driven by hydrocarbon and infrastructure. Rail, renewables, rural water supply, T&D and commercial/residential building, all contributed to growth. The prospective order pipeline stood at Rs. 10.07 trillion (up 34 per cent YoY), with infrastructure at Rs. 5.85 trillion, hydrocarbon at Rs. 3.47 trillion, power Rs. 0.45 trillion and the rest from ‘others’.

The Hyderabad Metro crossed the ridership mark of 500,000 daily passengers in July 2023, with a peak at 536,000 passengers. However, the project continues to operate at a loss, due to high interest cost. L&T has signed a teaming agreement with Navantia of Spain, to participate in the Project 75(I) bid for building submarines for the Indian Navy. The company filed for a new subsidiary — L&T Electrolyzer — with a factory in Hazira (Gujarat) to be commissioned in nine months. There is a strong outlook on projects in West Asia, with hydrocarbons, renewables and minerals/metals.

As for the buyback, under the current tax regime, this remains a tax-efficient way to distribute cash compared to dividends. Given reserves of Rs. 71,000 crore, the company can afford it.  

According to one valuation, the core business accounts for 66 per cent of L&T’s market-capitalisation now and the business has seen positive rerating due to order inflows. There could be 18-20 per cent upside to core business. The optimism is on account of strong order backlog and prospects in India and West Asia. If infra business operating margins have bottomed at around 5-6 per cent, there could be strong margins also. L&T’s steady reduction of debt indicates its balance sheet discipline.

According to Bloomberg, 24 of the 27 analysts polled over the two days (after results) are bullish on the stock (one is ‘neutral’, two are ‘sell’/’reduce’). Their average target price is Rs. 2,805, which indicates about 6 per cent upside from current levels.