L&T Q3 Results Review: Strong Order Pipeline To Boost Growth Outlook

Brokerages raised their estimates and target price of Larsen & Toubro Ltd. after its stellar third quarter performance, citing that a strong order pipeline in addressable markets will boost earnings in the coming quarters.

Although operating margins are still below their guidance on account of legacy order execution and new orders that have not yet achieved the margin recognition threshold, Motilal Oswal Securities said in a report. The company will benefit from a strong order pipeline in both India and international locations.

The company on Tuesday reported strong third-quarter earnings, beating consensus analysts' estimates, even as margins got impacted due to legacy orders.

L&T Q3 FY24 Highlights (Consolidated YoY)

• Revenue from operations rose 18.83% to Rs 55,127.8 crore. (Bloomberg estimate: Rs 53,571 crore).

• Ebitda, or operating profit, increased 13.52% to Rs 5,759 crore. (Bloomberg estimate: Rs 5,984.7 crore).

• Ebitda margin fell 48 bps to 10.44%. (Bloomberg estimate: 11.2%).

• Net profit surged 17.24% to Rs 3,594.51 crore. (Bloomberg estimate: Rs 3,245.7 crore).

Motilal Oswal Securities:

• L&T’s 3QFY24 revenue beat our estimates, but lower-than-expected margins led to a miss in PAT.

• L&T has been benefiting from strong inflows, particularly from international geographies, and has received orders worth Rs 1.8 lakh crore during 9MFY24 for its core E&C segment.

• The company has maintained its focus on mega and ultra-mega projects and has been able to improve working capital YoY to 16.6% of sales.

• Margins are still below guidance owing to legacy order execution and new orders still not achieving the margin recognition threshold.

• The brokerage expects L&T to continue to benefit from the strong addressable market in both India and international locations.

• Revised estimates to bake in improved inflows and lower margins.

• Target Price increased to Rs 4,200 from the current market price of Rs 3,633 based on the SOTP methodology, valuing the core business at P/E of 28 times March 26E EPS, and a 25% holding company discount for subsidiaries.

• Higher multiples take into account the continuously improving prospect pipeline and improvements in net working capital and return on equity (RoE), despite margins being lower than guidance.

• The brokerage has maintained a ‘buy’ on the stock.

Citi Research:

• L&T reported strong project and manufacturing order inflow and P&M revenue/EBITDA growth in Q3 FY24.

• Further, the pipeline remains healthy due to the increase in hydrocarbon prospects.

• P&M/infrastructure margins were in line with muted expectations.

• Net working capital (NWC) and return on invested capital (RoICs) in core P&M businesses remain at very healthy levels, and as a result, consolidated RoE has improved to 15.2% on a trailing 12-month basis.

• Domestic order inflow was weak in Q3FY24. Near-term, Q4FY24/Q1FY25 may face some more headwinds in awards and execution due to the pre-election season in India.

• Margins should improve sequentially during FY25 as new projects start contributing.

• L&T remains well-placed to benefit from growth in capital expenditure in India and ME.

• L&T remains our top pick from a medium-term perspective.

Key Takeaways:

1.       Hyderabad metro: average ridership/day declined to 4.4 lakh passengers per day in Q3 FY24 vs. 4.62 lakh passengers a day in Q2 FY24. Although it was higher on a YoY basis.

Ridership fell sequentially due to longer holidays and the launch of a free bus scheme for women by the state government.

Hyderabad Metro loss narrowed to Rs 254 crore in Q3 FY24 vs Rs 332 crore a year ago.

The metro has received around Rs 900 crore of state government support to date, including Rs 150 crore in Q3 FY24.

2.       Out of L&T's total order book, the fixed price portion is 42-43%, and the rest has variable pricing.

3.       Around 80% of L&T's Middle East orders are from Saudi Arabia, and 92% of the company’s international orders are from the Middle East.