Larsen & Toubro Rating ‘Buy’; Third quarter results were a mixed bag

Larsen & Toubro Rating ‘Buy’; Third quarter results were a mixed bag

L&T’s results were a mixed bag with execution pick-up in Q3FY22 higher than our estimate, but core Ebitda margin (ex-services) was below our estimate. However, order inflows and cash generation remain robust. Our TP hike is also driven by the increase in market capitalisation of its listed subsidiaries.

Guidance retained for FY22F, but order inflow and Ebitda margin guidances appear challenging: We estimate that meeting the revenue guidance of low to mid-teen is achievable as we expect further ramp-up in execution in Q4FY22; however, we view achieving order inflow guidance of low to mid-teen growth as challenging (requires record level of Rs 800-bn inflows in Q4FY22 ). Order prospects are strong at Rs 3.92 trn for Q4, but a slowdown in order finalisations risks spill-over of these prospects into FY23F. Core Ebitda margin guidance of 10.5% for FY22 appears tough to achieve, in our estimate, based on 9MFY22 trends.

Development project assets on the right track towards marketability for an asset sale: Hyderabad Metro has turned Ebitda-positive with a rise in ridership, and further with refinance of Rs 130 bn of external debt (saving 260bp in debt costs), and potentially a budget support by the state government by end-FY22 the asset may achieve cash flow stability. Nabha Power has already demonstrated strong cash flow track record (net debt reduced by ~Rs20 bn since FY20 to Rs 50 bn in Q3FY22 ).

Mgmt is strongly focused on green technologies and on automation/digitalisation: L&T has digitalised its entire equipment fleet (11,000+ in nos) which is leading to productivity gains. Management is focused on green technologies with some tie-ups announced on fuel cells in recent months. Trading at 15.1x FY24F EV/Ebitda; maintain Buy with TP up to Rs 2,412

We continue to value L&T on an SOTP basis on FY23F and roll forward to Dec-23F estimates to arrive at our new TP of Rs 2,412, implying 27% upside, and maintain our Buy rating. Key risks are a delay in economic recovery, a sharp increase in cost of commodities such as steel and cement, and a rise in working capital.

Nomura


Check the source here –Source, Financial Express.