Q2FY24 Review: Larsen & Toubro: Solid order flows and healthy execution

1 Nov 2023 , 12:49 PM

L&T’s Q2FY24 core earnings were in-line despite weak OPMs. Intl business takes a lead, driving overall revenues (24% YoY) and NWC improvement (<17% of sales). Stellar inflows with multiple order wins (US$1-3bn size) in H1FY24 provides solid resilience and revenue visibility for FY26, even as uncertainties on near term domestic slowdown ahead of Elections obliged management to keep inflows and execution guidance open-ended. Analysts of IIFL Capital Services raise FY24/25/26 core EPS by 4/3/17%, respectively and revise SOTP based TP to Rs3423 (25x FY26 Core PAT). 

Blockbuster inflows beat estimates: 

Successful wins of ultra-mega Intl hydrocarbon orders from Saudi Aramco (>US$2bn each) has driven a robust +96% YoY jump in Core inflows to Rs730bn in Q2 (Rs1,234bn in H1FY24; 72% of FY23). Infra grew 12/57% YoY for Q2/H1 led by heavy civil, realty and Power T&D. HC (53%) + Infra (38%) were 92% of Q2 inflows. Order pipeline is robust at Rs8.8trn, +39% YoY with addition of mega Intl HC orders beyond Aramco, large domestic urban infra, steel capex and thermal & nuclear power plants. OB is Rs4.5trn, +21% YoY. 

Q2 Core results is a mixed bag: 

L&T’s core revenues were in-line, at Rs349bn, +24% YoY led by robust 93% jump in Intl revenues (33% share) while domestic execution was QoQ muted/+5% YoY. Domestic/ Intl Infra grew 12/90%, resp. driving 27% YoY jump in infra revenues. Strong Intl execution and robust cash collections aided QoQ reduction in NWC/sales at 16.7%. However, slower ramp-up in new projects and legacy low margin orders resulted in 150 bps miss on OPMs, at 7.4% (flat QoQ/ -80 bps YoY) and 15% miss in Ebitda (Rs2.6bn). Steady treasury gains and lower tax incidence aided in-line PAT of Rs15.5bn, +13% YoY. Buyback of Rs126bn aided 2% reduction in equity and TTM RoE of 15%. 

Cuts FY24 OPM guidance, but OI & revenues are open ended: 

L&T was prompt to trim down Ex-services OPM guidance from 9% to 8.5%, but expects healthier OPMs in FY25; it has kept inflow & revenue guidance open-ended with confidence on outperformance but marred by uncertainties on slow-down in decision making, cash flows/ execution and challenges in labour availability ahead of elections in Q4FY24.