This Largecap Industrial Stock Can Give 27% Gains, Anand Rathi Recommends Buy

Larsen & Toubro (L&T) is India's largest engineering & construction (E&C) company with an interest in EPC projects, Hi-tech manufacturing and services. It primarily operates in Infrastructure, Heavy Engineering, Defence engineering, Power, Hydrocarbon, and Services business segments. In revenue, the infrastructure segment contributes ~45% to consolidated followed by services (~30%). Anand Rathi has recommended buy for the stocks for a target price of Rs 1,972. The brokerage expects the price of the stocks from the levels of Rs 1553, closed on 16 May 2022 to gain around 27%.

Q4 Results

According to the brokerage, L&T's Q4 reflects its robust order inflows (excl. services: 58% y/y) and strong infrastructure division's revenue growth (~13% y/y), though inflation curbed overall margins (the EBITDA margin contracted 95bps y/y). Order finalization domestically has been delayed with the tender to-award ratio down to 51% in FY22 (70% in FY21). Despite this, domestic orders were up 28.6% y/y, on the low base, while international order inflow growth was a strong 77% y/y. The company has laid down a strategic plan for FY21-26, where initiatives, investments and focus would help to 11-13% CAGRs in domestic revenue and order inflows. FY23 order prospects are a strong Rs 8.53trn.

Anand Rathi has said, "We expect a sustained double-digit growth momentum, focus on cash-flow generation and execution, and reduced exposure to non-core assets. In the near term, however, the inflationary situation would squeeze margins."

The brokerage has also stated the E&C business was boosted by infra, power, and hydrocarbons. Infrastructure (up 14% y/y), power (up 22.5% y/y) and better execution drove E&C revenue up ~9% y/y. Heavy Engineering/Defence engineering/hydrocarbons declined 11%/21%/3% y/y on supply-chain disruptions and lower billing.

FY23 guidance, Lakshya 2026

L&T has conservatively guided that the group revenue and order inflows to grow 12-15% in FY23, and its core business margin to come at 9.5%. It has laid out a strategic plan for FY21-26 (Lakshya 2026), where the initiatives, investments and focus would help 11-13% CAGRs in domestic revenue and order inflows. "We reiterate our positive stance on the execution pace of its robust order backlog (~Rs3.6trn, 2.3x FY22 sales), sturdy balance sheet and plan to reduce exposure to non-core assets," The brokerage has said.

Buy for a target price of Rs 1,972

The brokerage has said, "To account for inflationary pressure and awarding delays, we have adjusted our estimates. Hence, we expect 13%/25% revenue/PAT CAGRs over FY22-24. Valuing the company on a sum-of-parts basis and at a 20x multiple for its core business, we arrive at a TP of Rs1,972 (earlier Rs2,242). We retain a Buy." According to the brokerage, the key risks for the stocks would be Sluggish capex, volatile crude-oil prices

Disclaimer

The stock has been picked from the brokerage report of Anand Rathi Securities. 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. Goodreturns.in advises users to check with certified experts before taking any investment decisions.