Larsen & Toubro Rating – Buy: Externally Affected Results
The print of L & T’s Q4 results was negatively affected by externalities on the three main fronts, with margins hit the hardest. In such a context, L&T has done very well in terms of order flow. Although the inflationary environment will limit recovery in margins, we plan L&T to maintain a healthy double-digit growth trajectory and cash flow production. Over the next 5 years, investing in new age technologies / assets will be similar to investing in hard concession assets, which L&T aims to exit during this period. We reduced SoTP ~ 8% to Rs 2,025 and held Buy.
Results from external influences; Healthy Order Backlog and Cash Flow Generation Enthusiasts: Revenue for L&T Q4FY22 reported an annual increase of 10/2/9% in Ebitda / PAT, met conservative consensus estimates and significantly missed our estimates. Although performance was affected by supply-chain problems and a focus on cash production, margin RM was affected by price pressures, delay in claims settlement and a mix of projects. The flow of orders through strong orders from abroad has increased, increased by 54% per annum and could have been more but in the absence of customer approval to delay the winning selected orders. Order backlog also grew a healthy 9% and cash production was healthy.
The guidelines seem reasonable at the starting point: L&T revenue growth (above 15%) meets FY22 guidelines when margins are missing (~ 110 bps vs. flat guidelines) and order flows (8% vs. double-digit guidelines). The inflationary environment in FY2023 will limit the potential of L&T for margin disappointment and the L&T guidelines reflect that. L&T has directed lower-to-middle-income teens to increase their income, which is quite achievable due to strong order backlog. Also note that & 98% of L & T’s order backlog is running well. It has also indicated a 12-15% increase in order inflows. The starting point is favorable with the official tender conversion ratio being 50% in FY22 vs. 70% in FY2021. This is reflected in the internal backlog of the order backlog at 73%, a five-year low.
Discount them on the way out; Similar Quantum planned new business investment: L&T shares positive growth for three discounts where L&T has ~ 85-billion exposure (equity + loan). L&T signaled the sale of the remaining road assets in a near-term event, followed by a stake sale in Nava. It may take time to get out of the Hyderabad Metro but L&T expects its asset exposure (~ 55 billion) to start declining this year. It expects to invest Rs 70-75 billion in new age green technology in the next four to five years
We reduced the fair price by 8%, maintaining the purchase at a reasonable 15X FY2023E Core EPS Evaluation: We reduced our FV ~ 8% to Rs.
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