Larsen & Toubro Rating ‘Buy’; valuations cheap given the outlook

By: |
December 21, 2020 4:30 AM

Rise in share of multilateral-funded projects bodes well; FY22/23e EPS up 3%; TP raised to Rs 1,510; ‘Buy’ retained

The relatively sharper decline in L&T has led to core valuations being at decade lows despite L&T being relatively more asset-light than it was in FY12.

L&T has underperformed the Nifty (9% decline YTD vs 11% rise in NIFTY) despite a series of order wins in Q3FY21 and a relatively strong tender prospect pipeline. We believe L&T has potential to deliver in the medium to long term.
Large order inflows in Q3FY21 are multilateral-funded, improving collections visibility: L&T’s share of multilateral funding in its domestic order book was at 43% at the end of Q2FY21, but so far in Q3FY21, L&T has secured high-speed rail (HSR) contracts worth Rs 320 bn and other large orders that are all multilateral funded. These increase the share of multilateral funding to >50% and provide increased visibility of both future execution and collections.
Working capital levels to improve in Q4FY21; however, we expect commodity headwinds: We estimate that Rs 16 bn of advances from high-speed rail (HSR) orders are to be received in Q4, which should lead to improvement in core NWC levels. However, a near-term rise in steel prices may lead to commodity-linked margin impact in H2FY21 (50% of order book of fixed price contracts).

Government thrust on infra and liquidity easing measures to benefit L&T: We estimate Rs 74 trn of capex over FY20-25 from the National Infra pipeline (NIP) based on significant share of projects securing financing. Further liquidity infusion measures by the Centre provide relief to L&T’s suppliers and contractors, which should aid execution in H2FY21. Trading at 16.3x FY22F EPS of Rs 76.6; maintain Buy with TP of Rs 1,510

The relatively sharper decline in L&T has led to core valuations being at decade lows despite L&T being relatively more asset-light than it was in FY12. Core PE and EV/Ebitda are significantly lower than past averages and significantly below FY11-14 levels, when the industry was in a slowdown.

We raise FY22F/23F EPS by 3% to account for stronger order inflows and associated rise in execution. We value L&T on an SOTP basis on Dec-22 estimates to arrive at our TP of Rs 1,510, implying 21% upside, and maintain our Buy rating.


Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Godrej Consumer Products shares zoom 25% on HUL’s Sudhir Sitapati’s appointment as MD and CEO, Q4 results
2MSCI adds 6 stocks to India index including 3 Adani shares; 33 scrips to India small cap index. Full list
3Gold price today, 12 May 2021: Yellow metal price falls on rise in US treasury yields, stronger dollar