In the wake of the COVID-19 outbreak, the infrastructure sector has continued to gain traction among traders, and even prominent pundits are positive on the sector. As a result, India's largest engineering and construction giant Larsen & Toubro Ltd has received a buy call from brokerage house IIFL Securities. From the current market price of Rs. 1,924 per share on the NSE, the brokerage has set a target price of Rs. 2230 and expects the stock to rise roughly 15.90 percent in 2022.
The brokerage’s take on Larsen & Toubro Ltd
IIFL Securities has highlighted in its latest research report that the company's "Ex services revenue growth of 12% YoY was soft at Rs227bn, marred by global supply-chain led execution headwinds in Intl projects (Rs50bn, -27% YoY), while domestic revenues bounced back, at 27% YoY growth (Rs178bn, 78% of mix), with a clear cashflow-focussed approach towards execution. Despite weak DE/HE/HC OPMs, the favourable mix, release of contingency claims, cost optimisation & productivity measures helped to offset inflationary headwinds and deliver Ebitda margins of 9.2% (+110/30 bps YoY/QoQ). Deleveraging further aided a 57% YoY increase in PAT (incl corporate) at Rs12.3bn, with 34% YoY/5% QoQ reduction in gross debt at Rs238bn (net debt: Rs48bn). TTM RoCE is 22.6% (+150bps QoQ) and NWC is 22%"
According to the brokerage the L&T's "Inflows from Hydrocarbon topped Infra by 20%, at Rs145bn (with 25% strike rate), enabling a strong 73% YoY growth in core (P&M) orders at Rs301bn in 2QFY22, beating the Street (IIFLe: Rs202bn). With 46% growth in 1HFY22, at Rs452bn, L&T is confident of driving 11-15% growth in FY22 (implying flat 2HFY22), at Rs1.4-1.5trn. Order prospects are 10% higher YoY, at Rs6.8trn, of which infra is Rs5.3trn (+20% YoY) and HC is Rs1.2trn (including large orders). Hyderabad Metro with its improving ridership (0.19m/day from 0.05) will help cut losses but awaits financial restructuring and external equity infusion. Nabha Power and IDPL residual stake sale are targeted in 6-9 months."
The brokerage has said in its report that "Core inflows for L&T (Rs301bn) were healthy, beating Street and IIFL estimates. L&T bagged orders from Oil & Gas, Metros, Rural Water Supply, Minerals and Metal, Public Space and Power T&D. YTDFY22 core inflows stood at Rs452bn, at 46% YoY growth. The company is also L1 in a large HC order. Ordering from the government is likely to pick up in 2HFY22, led by recent announcements of National monetisation and Gati Shakti Plan, while acceleration seen in PSU ordering activities will sustain. Private sector orders (20% of prospects & OB) are expected to improve FY23 onwards, driven by investment outlays announced by core industrials and emerging areas like Data Centres, PLI-led investments and new campuses for ITTS. Management expects robust order wins in 2HFY22, backed by healthy 12% YoY growth prospects of Rs6.83trn, of which Rs4.66trn is from the domestic and Rs2.16trn is from international markets."
IIFL Securities further noted that "The company has recently launched its online education platform 'L&T EduTech', utilising its technology capability through ITTS and domain expertise in engineering. It is also launching an Industrial E-com platform in a few months, while also planning to invest in other areas like electrolysers, batteries, Data Centres, etc. While initial investments are insignificant, the company intends to step these up over the next few years, and will provide more clarity in 4QFY22, while announcing strategic plan 'Lakshya-2026'."
"L&T remains confident of maintaining its OPM guidance of 10.3% for FY22, despite the inflationary environment, led by: 1) variable price contracts at ~60% of OB; 2) significant number of projects reaching margin threshold in FY22; 3) release in cost contingencies from projects nearing completion; 4) enhanced productivity through digitisation; 5) overhead cost optimisation initiatives, negotiation with suppliers & customers, etc. Contrary to the broad concern on profitability in the MAHSR project, L&T highlighted that there is no substantial change in cost parameters (incl. cost contingencies) wrt margins, despite steep commodity inflation witnessed in the last one year. The project is 3- 4% complete and expected to significantly ramp up in the next 12 months. L&T does not perceive any dent in projected margins in this project, over the course of execution. Large projects (DFCC), in the transportation segment, which witnessed cost overruns over FY19-20 due to significant delays in RoW, are now near completion and no further cost overruns are expected" said the brokerage.
Outlook & Valuation of IIFL Securities
IIFL Securities has claimed in its latest research report that "L&T expects acceleration in execution and project award activities, which would lead to growth and greater visibility for FY23-24. Further, L&T reiterated confidence in sustaining 10.3% margins in FY22 and does not expect any dent to OPMs on the MAHSR project (~10% of order book) on the back of solid cost contingencies built into the long lead cycle project. The strong order book of Rs3.3trn (+11% YoY, 3.2x TTM sales) should drive 18% Cagr in Core EPS in FY22-24ii. Valuations are attractive at 12.3x FY23ii Core EPS. Despite weak DE/HE/HC OPMs, the favourable mix, release of contingency claims, cost optimisation & productivity measures helped to offset inflationary headwinds and deliver Ebitda margins of 9.2% (+110/30 bps YoY/QoQ). Deleveraging further aided a 57% YoY increase in PAT (incl corporate) at Rs12.3bn, with 34% YoY/5% QoQ reduction in gross debt at Rs238bn (net debt: Rs48bn). Further, L&T asserted its target to maintain flat NWC YoY, at 22.3% levels. Thus, we recommend a 'Buy' on the stock with a long-term target of Rs. 2230."
The stock has been picked from the brokerage report of IIFL Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.