Larsen & Toubro - Strong beneficiary of a capex pickup; reiterating a Buy with target price of Rs 1763

Anand Rathi is upbeat about L&T as one of the key beneficiaries of infra-structure development for 90% of the addressable opportunity in the government’s Rs 102 trn planned investment over FY20-25 under the flagship NIP. Anand Rathi expects hydrocarbon capex in the Middle East to revive because of rising crude-oil prices. L&T Management is firm about restructuring non-core assets such as the Hyderabad metro-rail, power projects and road assets, which have been impacting return ratios. Anand Rathi expects NWC to stabilise, resulting in better cash-flows. Anand Rathi retained a Buy with a sum-of-parts based higher target price of Rs 1763 (earlier Rs 1616). Larsen & Toubro share price today is Rs 1400, down Rs 11 or 0.8%.

Key beneficiary of government’s infra focus: 

The government has planned a staggering Rs 102 trn capex over FY20-25, under the NIP. L&T would be a major beneficiary as it is a proxy of infra development due to its highly diversified operations, a 20% strike rate in large opportunities and impeccable execution capability. Anand Rathi expects 7%/10% order inflow growth in FY22/23.

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Hydrocarbon capex to revive with rising crude prices: 

50% of hydro-carbon orders are from international markets, which were hit by the fall in crude-oil prices. Hydrocarbon orders for 9M FY21 were down 24% yoy (international orders down 77% yoy). With crude-oil prices trending up, Anand Rathi expects hydrocarbon capex to revive and result in growth in FY22/23.

Focus on restructuring non-core business: 

L&T has, over time, invested in non-core assets, affecting its profitability and return ratios (average RoE: 13% over FY17-20). It intends to restructure/exit non-core assets such as Nabha Power, the Hyderabad metro-rail, infra and other power assets. This should result in better return ratios, Anand Rathi believes.

L&T Valuations: 

With robust orders and a sturdy pipeline, revenue assurance is healthy. We expect 17%/28% revenue/PAT CAGRs over FY21-23. Valued on a sum-of-parts basis and at a 20x multiple for its core business, Anand Rathi arrived at a higher target price of Rs 1763. Anand Rathi retains a Buy rating on the stock. 

L&T Risks: 

Sluggish capex and volatile crude prices.