Defence Stock To Buy: Brokerages Upgrade Estimates On L&T Share After Q2, 20% Potential Upside In Near Term

One the of leading defence stocks would be Larsen & Toubro who has reported robust growth in the September quarter of FY24. Following strong Q2, brokerages have upgraded their estimates on the company and the majority of them have recommended buying. A potential upside of 20% is likely in L&T shares ahead. It would be robust order prospects that make L&T an attractive defence stock to buy.

During Q2FY24, L&T recorded consolidated revenue of Rs 51,024 crore, recording a y-o-y growth of 19%, primarily aided by improved execution of the large order book and accelerated progress in the Projects and Manufacturing portfolio. International revenues during the quarter at Rs 21,898 crore constituted 43% of the total revenue.

Meanwhile, PAT stood at Rs 3,223 crore, registering a significant growth of 45% compared to the corresponding quarter of the previous year.

In the quarter, the company received orders worth ₹ 89,153 crore at the group level, recording a robust growth of 72% on a y-o-y basis. During the quarter, orders were received across diverse segments like Onshore verticals of the Hydrocarbon business, Urban Transit systems, Transmission and distribution as well as Residential and commercial Space. International orders at ₹ 59,687 crore during the quarter comprised 67% of the total order inflow.

On BSE, L&T shares ended in red at Rs 2,894.35 apiece, down by 1.18% after market hours of Wednesday. The company's market cap stood at nearly Rs 4.07 lakh crore.

Talking about the financial performance, analysts at Prabhudas Lilladher said, "Larsen & Toubro (LT) reported a healthy set of quarterly performance with consolidated revenue growth of ~19.3% YoY, while margins contracted 41bps YoY, due to business mix and legacy project reaching completion. NWC to sales improved to 16.7% vs 19.8% in H2FY23, owing to strong cash collections with FY24 guidance maintained at 16-18%."

Alsop, PL's analysts added, "Tender prospects from Infrastructure stands at Rs5.06trn and Hydrocarbon Rs2.9trn for H2FY24. Hyderabad metro reported a profit of Rs2.4bn vs loss of Rs3.3bn in Q2FY23, owing to increased ridership and TOD monetization."

Going ahead, the analysts at Prabhudas have raised their target on L&T. Their note said, "We believe L&T is well-placed to benefit in the long run with 1) strong tender prospects, 2) better order conversion in the domestic market, 3) significant traction in hydrocarbon and 4) renewable energy orders from international markets like Saudi Arabia and expected uptick in private capex in the domestic market. The stock is currently trading at PE of 30.3x/25.7x/22.1x FY24/25/26E."

Hence, PL's analysts note said, "We revise our FY24/25E by 6.1%/5% factoring in improved performance of Hyderabad Metro, strong order book and tender prospects. We roll forward to Sep'25E and maintain a 'Buy' rating on the stock with a revised TP of Rs3,437(Rs3,302), valuing the core business at PE of 24x Sep'25E."

Along similar lines, Centrum has upgraded its rating to Buy on L&T. Its note said, "The management continued to keep order inflow and revenue guidance constant at 10-12% and 12-15% for FY24, despite good performance in 1HFY24. The key highlight of the quarter was the twin 'Ultra Megaprojects' bagged by the company in the Middle East in the hydrocarbon segment. Overall, order inflow increased by 72% YoY with Rs891bn of inflow in 2Q, taking the total orderbook to record levels of Rs4.5tn. Given the strong order book of Rs4.5tn, robust prospect pipeline of Rs10tn, controlled NWC environment and improving development business dynamics, we have upgraded our rating on the company to Buy from Add. We have tweaked our PAT estimates for FY24 and FY25 upwards by 4.8% and 4.7% respectively."

Further, Centrum's note said, "We are building in 18% revenue growth in core E&C business with more than 150bps margins improvement by FY26. We continue to value L&T based on the SOTP method with core E&C business being valued at 25x PAT and add the value of listed subsidiaries based on a 20% discount to the current market cap. We also add the value of development business based on ~0.5x P/B to arrive at our target price of Rs3,465. We upgrade the stock to Buy as we expect continued traction in execution and order inflow across India and the Middle East on account of strong macro-economic conditions and positive outlook on crude prices respectively."

Although Kotak Institutional Equities raised its estimates on L&T, it stayed on 'REDUCE' on the stock price.

Kotak's note said, "The 12% higher FV reflects the effect of higher estimates, roll-forward, lower 20% holding company discount and higher value of subsidiaries. We retain our margin estimates and 21X multiple for core E&C. We remain cautious, as the stock prices in 27X two-year forward core E&C EPS for the next 10% of upside. This appears aggressive for a business (1) already with a high share of Saudi, (2) exposed to the risk of government spending moderating in the next two years, (3) lacking operating leverage and (4) having a track record of volatile margin." The fair value for L&T stock price is Rs 2,700 by Kotak.

Earlier, Sharekhan's Diwali picks report said, that L&T remains at the forefront to reap benefits from the AtmaNirbhar Bharat scheme with its diversified businesses across sectors such as defence, infrastructure, heavy engineering and IT and is the best proxy for domestic capex.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.