Maintain ‘buy’ on L&T with SOTP-based PT of ₹2,405

Discussions are on with ESG rating agencies on the defence exposure. We maintain L&T is on a re-rating path, esp. with capex showing recovery trends. Any ESG rating upgrade would be an added sweetener. Buy.

Green portfolio is 29.6% of FY21 revenues and on an uptrend: Renewable energy doubled from 5% of consumption in FY16 to 10% in FY21.
Green portfolio is 29.6% of FY21 revenues and on an uptrend: Renewable energy doubled from 5% of consumption in FY16 to 10% in FY21.

Key takeaway: We hosted Pradeep Panigrahi, head of sustainability, P Ramakrishnan, VP IR and Corporate Accounts, and Harish Bihani, Jt GM IR. Management mentioned that ESG has been core to L&T even before the regulatory/investor requirements came. Discussions are on with ESG rating agencies on the defence exposure. We maintain L&T is on a re-rating path, esp. with capex showing recovery trends. Any ESG rating upgrade would be an added sweetener. Buy.

Five-year strategic plan to integrate ESG goals also: L&T should unveil its 5-year strategic plan for FY22E-226E, over the next 6 months. Covid led to delays, but the principal of outlining a holistic plan including ESG is on track. Investment needed to be water neutral by 2035 and carbon-neutral by 2040 is being reviewed. Gender diversity is not an easy target to achieve given the nature of business including remote locations of work. However, management reiterated that they are an equal opportunity employer and are seriously looking for means to improve female representation.1.2 mn lives have been positively impacted by L&T’s sustainability initiatives in water, education, health and skills building. Aim remains to improve quality of life, mitigate social inequities & help individuals realise their true potential in targeted communities.

Green portfolio is 29.6% of FY21 revenues and on an uptrend: Renewable energy doubled from 5% of consumption in FY16 to 10% in FY21. Management surpassed the 25% FY21 target for green portfolio revenues that it set in FY15-16. Solar and hydropower projects, power T&D, green buildings, water and resource conservation, solid waste management and emission reduction through building mass rapid transport systems are a part of L&T’s green portfolio.

Defence – unlikely to become materially meaningful from 2.5% of revenues in FY21 as other segments grow: Management reiterated L&T’s published FY21 integrated sustainability report stance that it does not manufacture any explosives or ammunition of any kind, including cluster munitions or anti-personnel landmines or nuclear weapons or customise for such munitions. Defence is an extension of L&T’s engineering capabilities. ESG rating agencies have raised concerns as L&T is associated with work on India’s nuclear submarine Arihant and Pinaka missiles, which the company is trying to address.

Return ratios — being pursued rigorously: Reducing debt, creating shareholder value through dividends, and reducing cash calls outside the core are meaningful re-rating triggers ahead for L&T. Private sector capex uptick prospects and its recent foray into the online education space are potential medium-term value creators. We maintain our Buy rating, with a SOTP-based PT of ₹2,405, valuing core E&C at 10x Sept 23E EV/EBITDA (consol PB of 3.5x and 17.5x EV/EBITDA Sept 23E). Risks: 1) Management not following prudent capital allocation; and 2) Government infra spend not growing from pre-Covid levels.

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