Q4FY23 Review: Larsen & Toubro: Dismal OPMs spoil the party

11 May 2023 , 11:41 AM

After a strong beat in FY23 inflow (+19% YoY, Rs1.7trn) and 12% rise in OB at Rs4trn (3.2x sales), L&T has turned cautious on execution in FY24, due to event based risks of elections and Warrelated global supply chain-disruption. However, confidence in the structural growth drivers remains intact with strong prospect list of Rs9.4trn (+14% YoY) for FY24. L&T targets group revenues / inflows of 12-15%/ 10-12%, respectively. Core OPMs are likely to be soft over 2-3 yrs in 9-10% range. But unparalleled focus on cashflow backed execution, and healthy advances has enhanced confidence in sustaining 16-18% NWC cycle in the interim.

Q4FY23 performance: 

Revenue grew 8% YoY to Rs432bn, despite strong rebound in Intl sales (30% of sales, 38% YoY) as domestic revenue continued to decelerate QoQ to flat sales. Cost headwinds in Infra (7.5% OPM in Q4), restricted P&M Ebitda margins to 8.6% (-70 bps YoY). Yet, standalone PBT margins were YoY flat at 10.1% owing to healthy treasury gains. Strong collections, advances and reduction in NWC to 16% of sales (270 bps YoY) and aided 12% reduction in core debt to Rs187bn.

Weak OPMs dampen earnings outlook: 

120 bps YoY drop in Ebitda margins in Infra to 7% was disappointing; due to cost pressures across various mid-mile projects, while higher input prices and project close-out expenses were incurred in H1FY23. Increase in competition across new orders will keep Core OPM lower vs 11-12% range earlier. FY24 P&M OPM guidance of 9.1% (+50 bps YoY) is lower than FY22 OPM of 9.5%. L&T expect FY25 OPMs to improve, but refrains from guiding 2Y fwd. It is closely working to improve execution efficiencies, RM sourcing and keep NWC lean, to drive higher RoCE (FY23: 23.6%, +1pps).

Eyeing higher pay-outs: 

L&T has stepped up dividends to 43% of standalone PAT in FY23 and targets to return cash to shareholders through some means by FY26. Incremental investments will be directed towards building capabilities in green energy & strategic assets for large projects. Divestment of IDPL is expected in H1FY24.

Core OPMs are likely to be soft over 2-3 yrs in 9-10% range. But unparalleled focus on cashflow backed execution, and healthy advances has enhanced confidence in sustaining 16-18% NWC cycle in the interim. Analysts of IIFL Capital Services cut FY24/25 Core EPS by 5/2% and consolidated EPS by 7/3%, resp. Their SOTP based TP implies headroom for 8-10% upside.