L&T - Growth Drivers In Place: Motilal Oswal

Motilal Oswal Report

Our recent interactions with the management of Larsen and Toubro Ltd. make us believe that recent concerns related to its performance are transient, such as-

1. low YoY growth in domestic inflows in 9M FY24 was due to a high base of last year, particularly in domestic hydrocarbon;

2. lower-than-expected margins were attributed to legacy projects, which are now closer to completion in the next couple of quarters; and

3. high share of international projects, particularly in Saudi Arabia, where the addressable market is continuously growing.

The positive factors that will drive growth ahead, in our view, are:

1. the ramp-up of domestic inflows after elections,

2. the completion of low-margin legacy projects in next couple of quarters,

3. the constant reduction in working capital and the resultant return on capital employed improvement, and

4. low working capital in international projects despite being fixed-price projects.

We maintain our estimates and SoTP-based target price of Rs 4,200, valuing the core business at 28 times March-26E earnings per share. Maintain Buy.

Key risks and concerns

Slowdown in order inflows, delays in the completion of mega and ultra-mega projects, a sharp rise in commodity prices, higher crude prices, an increase in receivables and working capital, and increased competition are a few downside risks to our estimates.

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