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Larsen & Toubro Ltd
Infrastructure Developers & Operators | NSE : LT
Larsen & Toubro (L&T) India’s largest engineering & construction (E&C) company with interest in EPC projects, Hi-tech manufacturing and services.
Focus on asset monetisation to further strengthen the balance sheet and improve return ratios. The net working to capital ratio significantly improved from 23.2% in Q3FY22 and 22.2% in Q4FY21 to 19.9% in Q4FY22. The company has generated strong cash flow from operations in FY22 to the tune of ₹ 15000 crore. Also from a leverage perspective, standalone entity has very low debt while the debt for concessions portfolio is down by ₹2100 crore and standalone entity is down by ₹4300 crore in FY22. We maintain our BUY rating and value L&T at ₹ 1920 on SoTP basis.
Frontloading of the government capex…
Despite Contrary to the expectations that government’s move like cutting of excise duty and increase in fertiliser subsidy would prompt curtailing capex spend, the government want to frontload the capex for FY23 and expects to spend 60% of the capex pegged for FY23 in H1 itself. To support the argument, in April 2023, the capex spent is up 67% with segments like railways and roads leading. Also, fresh investments announced in FY22 has almost gone up 2x to ₹ 19.3 lakh crore vs.₹ 10.8 lakh crore in FY20. Fruition of the above investments will lead to increase order flows for capital goods sector. Given private balance sheets are in fine shape now, their participation in capex is likely to inch upwards. From the above data point, share of private sector in fresh projects announcements has gone from 55% in FY20 to 68% in FY22.
Strong Inflows and revenue visibility
All capital goods companies in aggregate have witnessed 64% YoY growth in order inflows coupled with a strong backlog. This we believe with pick up in execution can lead to 15-18% growth in revenues for FY23 and FY24. The order inflows are coming from diverse sectors like railways, road, power T&D, digital automation, renewable sector, cement, Oli & gas etc which reduces the risk of concentration.
Correction in steel prices augurs well for margin recovery
Steel is a primary raw material for all companies whether EPC based or product based. Product based companies have been successful in passing on the input price pressure in a significant way whereas EPC companies lagged in terms of passing on in FY22. But with steel prices already softening, margins of EPC companies is also likely to recover from FY22 levels thereby aiding revenue growth.
Balance sheets are pristine for product based companies and decently managed for EPC companies, so interest rates might not be a significant dampener
Product companies will not get impacted by increase in interest rates given most of the product cap goods are debt free and cash rich companies. As far as EPC goes, working capital cycle has improved substantial over FY20-FY22. Most of them are at comfortable leverage, however any rise in finance costs will get cushioned by operational growth. For instance, EPC company like Thermax is completely debt free while a behemoth like L&T (barring L&T finance) has miniscule debt on balance sheet.
Valuations reasonable and relative under-ownership = Outperformance
Most of the EPC companies given their growth prospects are trading 12-16x on FY24 EPS while products based companies are trading northwards of 25-30x and relatively under owned which might lead to rerating given the robust performance outlook, lean balance sheet and reasonable valuations. Key top picks: L&T, Siemens, Timken, AIA, Ador Welding, Data and BEL
| Particulars (₹ crore) | Amount |
|---|---|
| Market Capitalization | 500,833.2 |
| 52 week H/L (₹) | 3,860.0/2,168.5 |
| Equity Capital | 281.1 |
| Face Value (₹) | 2.0 |
| (Year-end March) | FY20 | FY21 | FY22 | FY23E | FY24E |
| Net Sales (| crore) | 82,383.6 | 73,315.6 | 89,160.8 | 1,12,698.8 | 1,28,539.2 |
| EBITDA (| crore) | 6,838.2 | 7,266.2 | 8,019.0 | 10,628.1 | 12,250.2 |
| Net Profit (| crore) | 6,679.3 | 11,363.0 | 6,964.5 | 9,081.7 | 10,120.3 |
| EPS (|) | 48.1 | 81.9 | 50.2 | 65.5 | 72.9 |
| P/E (x) | 31.8 | 18.7 | 30.5 | 23.4 | 21.0 |
| Price / Book (x) | 4.1 | 3.5 | 3.3 | 3.0 | 2.8 |
| EV / EBITDA | 34.4 | 32.1 | 29.0 | 21.8 | 18.7 |
| RoCE | 7.5 | 7.4 | 8.0 | 10.2 | 11.1 |
| RoE (%) | 12.9 | 18.8 | 10.8 | 12.9 | 13.2 |
ANALYST CERTIFICATION
I/WeChirag Shah, PGDBM , Vijay Goel, PGDBM, Ameya Mahurkar, MFM (Master in Financial Management) and Yash Panwar PGDM Finance, IT Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
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