Larsen & Toubro (LARTOU)

CMP: ₹ 3420 Target: ₹ 4150 (21%) Target Period: 12 months BUY

February 7, 2024

Best Capex play…

• About the stock: Larsen & Toubro (L&T) is India’s largest engineering &

Company Update
construction (E&C) company, with interest in EPC projects, hi-tech
Particulars
manufacturing and services. The company primarily operates in
Particular Amount
infrastructure, heavy engineering, defence engineering, power,
Market Cap ₹ 475685 Crore
hydrocarbon, services business segments ₹ 21808.7 Crore
Total Debt
• Infrastructure segment contributes ~45% to consolidated revenue followed Cash & Inv. ₹ 7704.1 crore
EV ₹ 489789.3 Crore
by services (~30%)
52 week H/L ₹3739 / ₹2082
Equity capital ₹ 227.5 crore
Q3FY24 Performance: Consolidated Revenues of ₹ 55,128 crore for Q3FY24 up 19%
Face value ₹2
YoY, aided by ramp up in execution of the strong order book in the Projects and
Manufacturing portfolio. On the standalone basis revenues at ₹ 31600 crore, up Shareholding pattern
~14% YoY. Consolidated margins came in at 10.4% vs. 10.9% the miss is on account Mar-23 Jun-23 Sep-23 Dec-23
of lower margins in the infrastructure segment on account of legacy projects and Promoter 0.0 0.0 0.0 0.0
mega projects not entering the threshold levels. Consequently, PAT grew by ₹ 2947 FII 24.5 25.3 25.7 25.5
crore, up 20% YoY.
DII 38.6 38.0 37.2 37.3
Investment Thesis: Remains broadly intact Other 36.9 36.7 37.1 37.2

• Strong ordering prospects and inflows provided solid visibility: Order Price Chart

ICICI Securities – Retail Equity Research

prospects for L&T for Q4FY24E stands at ~₹ 6.3 lakh crore, up 29% YoY 350
with majority of its prospects coming in from infra and hydrocarbon 300
segment. With 49% YoY growth in order inflows and order backlog at
250
₹470000 crore makes us believe that L&T will easily deliver a revenue
200
CAGR of ~14% over FY24E-FY26E. With margin pain from legacy profits
coming to an end and strong pick up of execution in new orders will lead 150
to margins improving to 9.1% by FY26E from 8.4% in FY24E. Also NWC 100
ranging in between 16-18%, we believe L&T will generate significant cash 50
flows from operations. 0
1-Jan-21 12-Jan-22 23-Jan-23 3-Feb-24
• Focus on shareholder value creation remains unabated: L&T is well
L&T NIFTY
on course to achieve its ROE target of 18% by 2026. In order to achieve the
same, the company has resorted to selling non-core assets, no boot assets, Key risks
initiating buybacks and focusing profitable growth (reasonable margins
order and significant reduction in NWC as % of sales). The real kicker for • Key Risk: (i) Slowdown in order
ROE’s will come from divestment of equity in Hyderabad Metro which inflows (ii) lesser than expected
might happen over 2–3-year period and company has been taking active improvement nt in margins
steps to achieve the same. The company reported annualised ROE Research Analyst
Rating and Target Price Chirag J Shah
[email protected]
• We assign BUY rating to L&T. We value L&T at SOTP-based target price
of ₹ 4160 (Base business at 30x FY26E EPS) and consider as the best
capex play in largecap capital goods space.

Key Financial Summary

5-Year
2-Year CAGR
Particulars (₹ Crore) FY22 FY23 FY24E CAGR (FY18- FY25E FY26E
(FY24E-FY26E)
FY23)
Net Sales 101,000.4 110,501.0 129,477.5 11.7% 149,946.1 167,526.2 13.7%
EBITDA 9,055.5 9,294.7 10,874.9 8.0% 13,384.7 15,058.6 17.7%
EBITDA Margin (%) 9.0 8.4 8.4 8.9 9.0
Adj. Net Profit 7,669.0 7,792.6 10,523.7 15.7% 11,663.6 13,244.4 12.2%
Adj. EPS (|) 56.8 58.4 75.9 84.1 99.0
P/ E (x) 59.7 58.1 44.7 40.3 34.3
RoNW (%) 12.1 11.5 13.6 13.8 14.6
RoCE (%) 8.9 8.7 9.6 11.3 11.8

Source: Company, ICICI Direct Research; Pl note: We have not amalgamated numbers from its new Li-On cell manufacturing facility in FY26E and continue to value this venture separately
 Company Update | Larsen & Toubro ICICI Direct Research

Key result and concall highlights

• L&T reported a decent set of Q3FY24 results. The order inflow for 9MFY24
stood at ₹ 230,662 crore, up 49% YoY. International orders at ₹ 137,894
crore constituted 60% of the total. The inflows for Q3FY24 stood at ₹
75,990 crore, up 25% YoY. The consolidated order book is at ₹ 469,807
crore as on Q3FY24 up 22% YoY. The company ordering prospects are up
22% YoY to ₹ 627000 crore mainly emanating from infrastructure and
hydrocarbon segment.

• Consolidated Revenues of ₹ 55,128 crore for Q3FY24 up 19% YoY, aided

by ramp up in execution of the strong order book in the Projects and
Manufacturing portfolio. On the standalone basis revenues at ₹ 31600
crore, up ~14% YoY. Consolidated margins came in at 10.4% vs. 10.9% the
miss is on account of lower margins in the infrastructure segment on
account of legacy projects and mega projects not entering the threshold
levels. Consequently, PAT grew by ₹ 2947 crore, up 20% YoY. The NWC
continues to remain at very comfortable levels of 16.6%.

• Share of private sector stood at 22% in the overall backlog while that of
central and state govt stood at 12% and 35% respectively. The slow
moving order stood at less than 1% in the overall backlog.

• On the guidance front, Order inflow growth is revised to 20% + for FY24,
revenues in high teens and EBIDTA margins in the range of 8.25-8.5%
(Core E&C).

• Ordering Prospects are up 29% YoY for Q4FY24 at Rs 627000 crore with
main contribution coming in from Infra segment at Rs 410000 crore and
Hydrocarbon segment at Rs 170000 crore.

• The company has converted its loans to Hyderabad Metro into equity to
reduce leverage of the asset and increase its profitability. The loss reported
for 9MFY24 stood at Rs 349 crore whereas the ridership stood at 4.44 lakh
passengers per day in Q3FY24 vs. 3.94 lakh passengers per day in
Q3FY24.

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 Company Update | Larsen & Toubro ICICI Direct Research

Valuation Outlook
• We assign BUY rating to L&T. We value L&T at SOTP-based target price
of ₹ 4160 (Base business at 30x FY26E EPS) and consider as the best
capex play in largecap capital goods space.

• L&T reported a strong order book of crore, suggesting good revenue

visibility in coming years. L&T has targeted revenues and order inflow
CAGR of 15% and 14%, respectively, over FY21-26 with a consolidated
RoE of 18%. L&T will focus on emerging portfolios like green EPC,
manufacturing of electrolysers, battery & cell manufacturing, data centres
and platforms (Sufin & Edutech) in the next five years. Focus on asset
monetisation to further strengthen the balance sheet and improve return
ratios. Strong b/s, controlled working capital and strong cash generation
will lead to rerating of the stock in the medium term

Exhibit 1: SOTP-based valuation

Company
Bull case % of total Base Case % of total Bear Case % of total
(|per share)
Base Business 3958.0 72.6 2968.5 71.4 1681.4 66.9

L&T Finance Holdings 194 3.6 165 4.0 116 4.6

L&T IT Subsidiaries 1099 20.2 934 22.4 659.2 26.2

L&T Power Development 13 0.2 8.6 0.2 7.7 0.3

L&T MHI JV 12 0.2 5.0 0.1 5.7 0.2

L&T IDPL 144 2.6 65.3 1.6 30.9 1.2

Other E&C, MIP & E&E Sub 29 0.5 14.3 0.3 12.3 0.5

Total 5448 100.0 4160 100.0 2513 100.0

Source: ICICI Direct Research

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 Company Update | Larsen & Toubro ICICI Direct Research

Financial Summary

Exhibit 2: Profit and loss statement ₹ crore Exhibit 3: Cash flow statement ₹ crore
(Year-end March) FY23* FY24E FY25E* FY26E* (Year-end March) FY23* FY24E FY25E* FY26E*
Total operating Income
110,501.0 129,477.5 149,946.1 167,526.2 Profit after Tax 8,097.8 10,523.7 11,663.6 13,727.8
Growth (%) 9.4 17.2 15.8 11.7 Add: Depreciation 1,310.0 1,493.1 1,611.9 1,730.7
Raw Material Expenses
14,492.4 16,666.1 18,056.3 22,154.7 (Inc)/dec in Current Assets4,093 -14,846 -21,409 -9,528
Employee Expenses 8,298.2 9,002.8 10,798.8 11,437.6 Inc/(dec) in CL and Provisions
-7,741.4 11,166.7 15,556.6 9,711.2
Other Operating Expenses
63,528.6 75,345.4 88,440.3 97,544.2 Others - - - -
Sales, admin & Other Exp
2,513.9 3,959.1 5,523.3 6,479.0 CF from operating activities
5,758.9 8,337.0 7,423.4 15,641.7
Other Mfg. Expenses12,373.2 13,629.0 13,742.7 14,852.0 (Inc)/dec in Investments 500.0 500.0 500.0 500.0
Total Operating Expenditure
101,206.3 118,602.5 136,561.4 152,467.5 (Inc)/dec in Fixed Assets-2,700.0 -1,200.0 -1,200.0 -1,200.0
EBITDA 9,294.7 10,874.9 13,384.7 15,058.6 Others 0.0 0.0 0.0 0.0
Growth (%) 2.6 17.0 23.1 12.5 CF from investing activities
2 36.8 -1,406 -2,420 -1,059.3
Depreciation 1,310.0 1,493.1 1,611.9 1,730.7 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0
Interest 1,856.5 1,771.3 1,686.2 1,601.1 Inc/(dec) in loan funds 0.0 0.0 0.0 0.0
Other Income 4,035.0 5,604.0 4,498.4 4,787.2 Dividend paid & dividend-3,368
tax -3,789 -4,210 -4,911
PBT 10,163.2 13,214.4 14,585.0 16,514.0 Inc/(dec) in Sec. premium 50.0 50.0 50.0 50.0
Others 0.0 0.0 0.0 0.0 Others 0.0 7.6 0.0 0.0
Total Tax 2,463.4 2,690.8 2,921.4 3,389.0 CF from financing activities
-4,196 -4,617 -5,038 -5,739
Adj. PAT (Ex-E&A) 5,414.6 10,523.7 11,663.6 13,244.4 Net Cash flow 1,800.0 2,314.4 -34.5 8,843.2
Growth (%) -29.4 94.4 10.8 13.6 Opening Cash 5,904.1 7,704.1 10,018.5 9,984.1
Adj. EPS (|) 39.0 54.2 84.1 99.0 Closing Cash 7,704.1 10,018.5 9,984.1 18,827
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 4: Balance Sheet ₹ crore Exhibit 5: Key ratios

(Year-end March) FY23* FY24E FY25E* FY26E* (Year-end March) FY23* FY24E FY25E* FY26E*
Liabilities Per share data (|)
Equity Capital 280.9 280.9 280.9 280.9 EPS 39.0 54.2 84.1 99.0
Reserve and Surplus69,911.4 76,818.4 84,444.4 93,433.0 Cash EPS 67.8 86.6 95.7 111.4
Total Shareholders funds
70,192.3 77,099.3 84,725.3 93,713.9 BV 506.6 556.4 611.3 676.1
Total Debt 21,808.7 20,808.7 19,808.7 18,808.7 DPS 24.0 27.0 30.0 0.0
Deferred Tax Liability 0.0 0.0 0.0 0.0 Cash Per Share 55.5 72.2 72.0 135.7
Minority Interest / Others 0.0 0.0 0.0 0.0 Operating Ratios (%)
Total Liabilities 92,948.2 98,920.2 105,611.2 113,664.8 EBITDA Margin 8.4 8.4 8.9 9.0
PBT / Total Operating income
9 .6 10.2 9.7 10.2
Assets PAT Margin 7.3 8.1 7.8 8.2
Gross Block 16,869.0 18,069.0 19,269.0 20,469.0 Inventory days 12.5 11.5 13.5 13.5
Less: Acc Depreciation7,389.6 8,790.2 10,309.5 11,947.7 Debtor days 130.0 130.0 130.0 130.0
Net Block 9,479.4 9,278.8 8,959.5 8,521.3 Creditor days 160.0 150.0 150.0 150.0
Capital WIP 1,100.0 1,100.0 1,100.0 1,100.0 Return Ratios (%)
Total Fixed Assets 10,579.4 10,378.8 10,059.5 9,621.3 RoE 10.7 10.4 13.8 14.6
Investments 45,174.2 44,674.2 44,174.2 43,674.2 RoCE 8.7 9.6 11.3 11.8
Inventory 3,343.3 4,815.6 6,276.3 6,116.0 RoIC 9.4 10.6 12.3 14.1
Debtors 39,356.5 46,115.3 53,405.5 59,666.9 Valuation Ratios (x)
Loans and Advances 667.6 989.7 1,109.5 900.8 P/E 58.1 44.7 40.3 34.3
Other Current Assets56,413.0 62,706.3 75,244.2 78,879.9 EV / EBITDA 52.1 44.2 35.9 31.2
Cash 7,704.1 10,018.5 9,984.1 18,827.3 EV / Net Sales 4.4 3.7 3.2 2.8
Total Current Assets
1 07,484.5 124,645.4 146,019.6 164,390.8 Market Cap / Sales 4.3 3.6 3.1 2.8
Creditors 48,438.8 53,209.9 61,621.7 68,846.4 Price to Book Value 6.7 6.1 5.5 5.0
Provisions 2,179.7 2,394.4 2,896.2 3,235.8 Solvency Ratios
Total Current Liabilities
78,602.7 89,769.4 105,326.0 115,037.2 Debt/EBITDA 2.3 1.9 1.5 1.2
Net Current Assets 28,881.8 34,876.0 40,693.6 49,353.7 Debt / Equity 0.3 0.3 0.2 0.2
Others Assets 0.0 0.0 0.0 0.0 Current Ratio 1.4 1.4 1.4 1.4
Application of Funds92,948.2 98,920.2 105,611.2 113,664.8 Quick Ratio 1.3 1.3 1.3 1.3
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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 Company Update | Larsen & Toubro ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according -to their notional target price vs. current market price and then categorizes them as Buy,
Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is
defined as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,
Third Floor, Brillanto House,
Road No 13, MIDC,
Andheri (East)
Mumbai – 400 093
[email protected]

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 Company Update | Larsen & Toubro ICICI Direct Research

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