Larsen & Toubro’s revenues and EBITDA for the first quarter were above expectations. The order flow growth was strong at 57% YoY, driven by both domestic and international segments. Prospect pipeline is down 15% YoY, but the management maintained its 12-15% YoY order flow and revenue growth guidance. We believe L&T should continue to benefit from execution and margin recovery as negative impact of supply disruptions and sharp rise in commodity prices continues to ease. The rating is ‘buy’.
Domestic order flow up 36%: Eighty per cent of the prospect pipeline is domestic and the management is optimistic of overall public sector infra spend (centre + state + PSU) being higher YoY. Infrastructure is 74% of the prospect pipeline. Power T&D is 19%, water 22%, transportation 19%, heavy civil 18% and buildings & factories 20% of the infra pipeline. The order book is at a record high with 28% orders coming from international markets.
E&C revenues up 23%, private sector capex looking up: L&T’s order book is `3.6 trillion, 2.3x FY22 sales, and gives comfortable revenue visibility for FY23E-24E. A 12% Y-o-Y rise points to double-digit FY23E revenue growth being met. Margins were lower YoY at 8.5% vs 8.8%, but as execution picks up, it should be made up. Steel, non-ferrous metals, building & factories, IT campuses, data centres and warehousing/delivery capability of e-commerce firms are seeing improving prospects on the private sector side. Thermal plants of 6-7 GW is providing an additional opportunity.
Core working capital 20.9% of sales: Working capital and cash generation focus remains. The Q1 was a seasonally-weak quarter on collections compared with Q4FY22 and the Q-o-Q deterioration is not a concern. The management maintained its FY23 guidance of 20-22% of sales with an endeavour to end at 20%. Collections ex-finance was up 26% YoY at Rs 0.37 trillion and contributed to the working capital improvement.
Valuations point to re-rating in historical context: For FY22-24E, we anticipate the core E&C EBITDA to rise at 23% CAGR compared with 16% in FY15-19 when it traded at 12x EV/EBITDA. The core business is currently trading at 7.6x FY24E EV/EBITDA ex-subsidiary valuations. We maintain ‘buy’ with a price target of `2,215. Risks include lack of prudent capital allocation and the government reducing its focus on capex spend.