Result Analysis – Larsen & Toubro Ltd.

Result Highlight: 

• L & T Consolidated Revenue rose 18.5% QoQ and 12% YoY to Rs 34773 crore was below the Estimates of Rs. 35965 Cr. EBITDA Margin Expanded YoY as well as QoQ to 11.49% led by margin expansion in Infrastructure, IT & Technology Services Segments.

• The company’s net profit after tax and share in profit/(loss) of joint ventures/associates from continuing operations before exceptional items was up 51.4 per cent YoY at Rs 2,135 crore.

• IT & Technology Services (IT&TS) Segment comprises L&T Infotech, L&T Technology Services and Mindtree revenue grew 28% in Q2FY22.

• Company bagged orders worth Rs. 42,140 crore registering a robust growth of 50% YoY. Orders were received in various segments like Oil & Gas, Metros, Rural Water Supply, Minerals and Metal, Public Space and Power Transmission and Distribution. The International orders at Rs. 22,116 crore during the quarter comprised 52% of the total order inflow.

• The consolidated order book of the group was at Rs. 330,541 crore as on September 30, 2021, at near record levels, with international orders having a share of 23%.

• The Hydrocarbon Segment secured orders valued at Rs. 14,503 crore in Q2FY22 registering significant growth over the corresponding quarter of the previous year. International order inflow constituted 90% of the total order inflow of the segment during the quarter.

• The Loan Book of Financial Services Segment decreased to Rs 86,936 crore as compared with September 2020 at Rs. 98,823 crore, reflecting a cautious lending approach, focus on collections, portfolio sell down, and a phased run down of the de-focused business portfolio.

Conference Call Highlights: 

• Prospects pipeline for 2HFY22 stands at Rs. 6.83t in 2QFY22 (v/s Rs. 6.13t YoY), up 12% YoY

• The current order book of Rs3.3trn is executable over 27 months, of which domestic is 77% and the remaining international. In the international market, Middle East contributes 15%, US &Europe 1% and the rest.

• Management has maintained its FY22 order inflow guidance of a low double digit to mid-teen growth YoY.

• The infrastructure segment’s margins improved in 2QFY22 on account of a favourable job mix, despite commodity price inflation. 60-65% of the company’s order book is on variable cost basis, thus shielding it from the ongoing commodity cost inflation.

• Maintained its FY22 margin guidance for the core E&C business (flat YoY) and will revisit its guidance at the end of 3QFY22. Working capital as a % of sales improved to 22% in 1HFY22 (v/s 26.7% in 1HFY21). The management aims to maintain working capital as % of sales at around the current levels (22%) by FY22-end

• The workforce stood at 260k, up from 235-240k in July of this year.

• The next five-year plan will be finalized by the end of CY21.

Outlook:

Larsen and Toubro reported strong growth in September quarter led by strong growth across all businesses except Financial Services. Company’s focus continues to be on efficient execution of its large order book, working capital reduction, cost optimization through use of digital technologies aimed at operational efficiencies. The consolidated order book at Rs 330,541 crore (2.4x FY21 revenues) provides healthy growth visibility for the company. Recently launched Gati Shakti plan would fast-track project implementation, under the National Infrastructure Pipeline, which, together with National Monetisation Plan, would keep government investment in infrastructure high. L&T’s current order backlog has 60-65% price variation contract which should help mitigate the impact of inflationary cost prices. Also, domestic recovery is set to accelerate due to near normal monsoon along with upcoming festive season. At the CMP of Rs. 1839, the company is trading at PE multiple of 29.50x.  Valuing the company at 19.4x FY23E EPS, we recommend buy on Larsen and Toubro at CMP of Rs. 1839 for the Target Price of Rs.2130.

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