We hosted Larsen & Toubro (L&T) at Edelweiss India’s Singapore Conference 2022. Key highlights: i) Centre/PSU capex is likely to drive infra momentum, even as macro concerns persist, while states lag. ii) Active core business portfolio rationalisation has helped optimise competitive positioning in high-growth segments like water/transportation/hydrocarbon/B&F. iii) Defence/ thermal power/hydrocarbon to lead mid-term growth.
All in all, L&T re-iterated a healthy pipeline and robust return/growth scale-up trajectory with a sharper focus on sustainability, expanding into emerging businesses. Metro turnaround, Nabha exit and buy-back would be levers to 18% RoE corridor, in our view. Retain ‘Buy’ with a SoTP-based TP of Rs 2,370 (core business valued at 25x PE).
Key takeaways from L&T’s commentary
L&T is optimistic on infra spends, despite a weak state-spends outlook. States have budgeted 30%-plus higher spends for FY23E, which might lag. Bulk of infra growth across defence, water, hydrocarbon, rail will be Centre/PSU-led. Private capex accounts for ~17% of OB for L&T (peak at 20-25%), of which 50% is pure industrial and the balance is real estate. L&T is geared to benefit further from greenfield capex (which is low) versus brownfield, which explains the current low private share. Competitive intensity is low in water, hydrocarbon, defence and T&D with 3-4 players dominating each segment. Roads has worsened with 20-plus players competing.
Bulk of 18% RoE target (vs. 11.5%; 13.5% ex-metro) should be achieved with current FY26E strategic plan – upside will depend on metro turnaround/buyback. Bulk of hydrocarbon projects opportunity is in the $200-900 mn ticket range; defence pipeline is significantly larger at Rs 300 bn-plus (vs. ~Rs 50 bn earlier).
Outlook and valuation: Focus on growth quality, returns; retain ‘BUY’
L&T’s focus has directionally been towards creating stakeholder value. Active E&C portfolio rationalisation, site-level cash flows, exit of non-core, better clarity on capital allocation and sharper sustainability focus are some key initiatives that could make a material difference going ahead. While L&T, in the recent past, has moved directionally with its IT subsidiaries, we believe expanding growth avenues, potential for a reasonable return/cash flow scale-up, should drive shareholder value creation going ahead. Retain ‘BUY/SO’ with a SoTP-based TP of Rs 2,370 (core business valued at 25x PE).