PL Stock Report: Larsen & Toubro (LT IN) - Event Update - Strong order prospects aiding revenue visibility - BUY

Larsen & Toubro (LT IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs2,944 | TP: Rs3,302

Event Update - Strong order prospects aiding revenue visibility

Quick Pointers:

§ L&T is the preferred contractor for ~US$3.9bn orders for Jafurah Unconventional Gas Field, Saudi Arabia (Source: Media article).

§ Revised upwards its share buyback price from Rs3,000 to Rs3,200/share, factoring in market sentiments.

We revise our FY24/25E estimates by 1.7%/3.7%, post factoring in healthy growth prospects for hydrocarbon business. The stock is currently trading at PE of 32.9x/27.1x FY24/25E. Maintain ‘Buy’ rating on stock with revised SoTP based TP of Rs3,302 (Rs2,955 earlier) valuing core business at PE of 25x FY25E (22x earlier), given recent large order wins aiding strong revenue visibility and improving Hyderabad Metro Performance. L&T has been issued letter of intent worth ~US$3.9bn from Saudi Aramco for phase-II expansion of its Jafurah unconventional gas production project which itself can meet ~13% of FY24 order inflow guidance. The company bagged orders worth Rs655.2bn in Q1FY24. We believe, L&T to comfortably surpass its order inflows guidance of 10-12% growth for FY24 (~Rs2.3trn in FY23) aided by large international and domestic order wins. The company had revised its tender prospects in Q1FY24 to Rs10.07trn for 9MFY24 vs Rs9.73trn guided for 12MFY24. The prospect revision was mainly in hydrocarbon business (Rs3.47trn guided in Q1FY24 vs Rs2.44trn in Q4FY23) mainly from Middle East market.

We believe L&T is well-placed to benefit in the long run given 1) strong tender prospects, 2) better order conversion in domestic markets, 3) significant traction in hydrocarbon and 4) renewable energy orders from international markets like Saudi Arabia and expected uptick in domestic private capex.

L&T bags order from Saudi Aramco worth ~US$3.9bn: L&T has bagged two engineering, procurement, and construction (EPC) orders as part of Saudi Aramco's second expansion phase in its Jafurah unconventional gas production project worth ~Rs332.6bn. Scope of work includes setting up a gas processing plant, its main process units and to construct gas compression units as part of the Jafurah unconventional gas production project. The first contract to set up a gas processing plant and its main process units is estimated to be worth ~$2.9 billion (~Rs 240 bn). Second contract to construct gas compression units is worth ~$1 billion (~Rs 83.2bn).

Increased Buy back price to Rs3,200 (~9% premium to CMP): L&T has increased shares buyback price from Rs3,000-3,200 per equity share, keeping total buyback value unchanged at Rs100bn. One of the key objectives of the company’s Strategic Plan, Lakshya ’26, is to enhance the return on equity (ROE). Return on equity capital to shareholders in the form of Buyback of shares of the Company is a step in that direction.

Higher Tender Prospects for 9MFY23: Tender prospects for 9MFY24 stand at Rs10.07trn vs Rs7.52trn in Q1FY23, comprising of infrastructure (Rs5.85trn vs Rs5.47trn in Q1FY23), Hydrocarbon (Rs3.47trn vs Rs1.02trn in Q1FY23), Power (Rs0.45trn vs Rs0.6trn in Q1FY23) and others (Rs0.29trn). Tender Prospects is higher compared to full year prospect guided earlier (in Q4FY23 concall) of Rs9.73trn, mainly due to increased prospects from hydrocarbon business (Rs3.47trn guided in Q1FY24 vs Rs2.44trn in Q4FY23) mainly from Middle East market.

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