March-April accounts for 50% and more of orders for the fourth quarter. Larsen and Toubro (L&T) announced Rs 14,300 crore orders in this quarter and Rs 41,200 crore more is needed to meet the lower end of the FY22E guidance. We believe L&T’s order flow should move to 15% CAGR in FY21-24E vs 10% seen in the last 10 years as railways including metros, Power T&D, PLI, data centres contribute. We lower our FY22E-25E EPS by 4-8% to factor in commodity price rise year-to-date (YTD). Order announcements and strategic plans are triggers ahead. We recommend ‘Buy for the company.
Growth of 48% year-on-year (YoY) in Q3 prospect pipeline should reflect ahead: L&T announced 18% of orders in railways, 39% in hydrocarbon and 12% in power T&D and water each in the quarter till date. Our estimates factor Rs 55,500 crore announcements in Q4, with another 1.5 months to go. The overall order flow including unannounced should be Rs 79,300 crore (56% YoY growth) and help L&T reach the lower end of its FY22E 13-17% YoY growth guidance. Buildings and factories which were 28% of announced orders at the peak is less than 12%.
Early data shows commodity impact is passed on over 2-3 quarters: L&T’s 65-70% of the order book is variable prices contracts where commodity costs are passed through. The company makes back-to-back purchase arrangements on the commodity side for fixed-price contracts, which limits the margin impact of volatile raw material prices. The management mentioned that the CY21 commodity price rise could have impacted margins by 50 basis points (bps) but was largely offset by operational efficiencies and revenue growth. We reduce our E&C FY22E-25E margin assumptions by 30-50 bps to factor in the rise in commodity prices, which could reverse if revenue growth or procurement strategy surprises.
Firm crude boosts Middle East (ME) order flow outlook: The company’s 25-30% of order flow is from overseas, which on the engineering and construction (E&C) side is primarily driven by the ME region. 22% of the Q3 pipeline was international projects and was up 98% YoY. L&T’s overseas E&C order flow tends to see better traction with an uptick in oil prices.
Valuations point to re-rating in historical context: FY22E-24E, we anticipate the core E&C Ebitda to rise at 19% CAGR vs 16% in FY15-19 when it traded at 12x EV/Ebitda. Our target price factors in 12x EV/Ebitda FY24E, which is lower than the FY08-12. The core business is currently trading at 5.2x FY24E EV/Ebitda ex-subsidiary valuations.
We maintain Buy with a target price of Rs 2,525 v/s Rs 2,675 to factor in the earnings change.
