What does the future holds for Larsen Toubro (NSE: LT)?

The company’s Projects and Hi-Tech Manufacturing businesses are rightly position to leverage the India and Middle East Capex opportunity and with tech-enabled skills and offerings, the IT & TS business will continue to pursue growth in the global services domain. Robust business portfolio including some of the newer businesses, focuses on cash generation distribution and eye on Capital Employed and finally the divestment of concessions and other non-core assets will lead to a better ROEs as envisaged in our strat plan for FY ’22 to FY’26. P. Ramakrishnan, Vice President at Larsen & Toubro (In Q2FY23 Earnings Conference Call).

Stock Data

Ticker (NSE) : LT

Exchange : BSE & NSE

Industry : Infrastructure, IT, Financial Services etc.

Price Performance :

Last 5 Days = +1.22%

YTD = +1.65%

Last 12 months = +11.27%

*As per 9th Jan 2023

Company Description:

Larsen & Toubro (L&T) is India’s largest engineering and construction (E&C) company with interests in EPC projects, hi-tech manufacturing and services. The company primarily operates in the infrastructure, heavy engineering, defense engineering, energy, hydrocarbons and services segments. The Infrastructure segment contributes ~45% to consolidated revenues, followed by Services (~30%).

Key Estimates regarding the future of the Company:

L&T has targeted revenue and order inflow CAGR of 15% and 14% for FY21-26 with a consolidated ROE of 18%. L&T will focus on emerging portfolios such as green EPC, electrolyser manufacturing, battery & cell manufacturing, data centers and platforms (Sufin & Edutech) in the next five years. Focus on monetizing assets to further strengthen the balance sheet and improve returns. Strong balance sheet, controlled working capital and strong cash generation.

We believe L&T is well positioned to benefit from an overall diversified tender outlook with better order conversion in the domestic market, a significant increase in investment from oil exporting countries, particularly in the hydrocarbons segment, and an expected increase in private investment. Given healthy OB, tender prospects, diversification into new business (hydrogen, green EPC), improving operational performance of Hyderabad Metro and continued execution momentum, we expect L&T to report revenue and PAT CAGR of 10.2% and 18.2% from FY22 to FY25.

The stock is currently trading at a PE of 26.7x/23.1x/ 19.8x FY23/24/25E. The order book is worth Rs 3.7 trillion. Order inflows rose 23.2% year-on-year to Rs 519 billion during the quarter, driven by contract wins in the public spaces, nuclear power, irrigation, ferrous metals, healthcare, renewables and refining sectors. International inflows contributed 33% to total order inflows. The order book is worth Rs 3.7 trillion (2.2x TTM revenue).

Analytical Insights:

The Indian economy is doing relatively well and is expected to continue its growth, albeit at a slower pace than previously expected. High inflation coupled with the threat of an unfavorable balance of payments amid an increasingly uncertain global economic environment are possible headwinds to the country’s growth trajectory. Major private sector investment that was set to fuel a major recovery may be delayed due to ongoing geopolitical and global economic turbulence.

On the plus side, with the success of its Production Linked Incentives (PLI) scheme, the government is likely to expand it to more sectors. The government is expected to intensify its efforts for structural reforms in critical areas such as labor, logistics, health and education. Strong tax collection this year will allow the government to maintain budgetary investment programs. Another golden point is the visibility of continued domestic consumption demand, which portends new investments.

On the global front, the economic outlook is clouded by key downside risks, namely conflict in Eastern Europe affecting food and energy supply chains, gradual polarization and the possibility of stagflation due to supply-led inflation in an uncertain demand environment. Amid these visible global upheavals, the GCC region, Projects’ core business geography, continues to invest in the oil and gas industry to accelerate production capacity.