L&T has underperformed the Nifty (9% decline YTD vs 11% rise in NIFTY) despite a series of order wins in Q3FY21 and a relatively strong tender prospect pipeline. We believe L&T has potential to deliver in the medium to long term.
Large order inflows in Q3FY21 are multilateral-funded, improving collections visibility: L&T’s share of multilateral funding in its domestic order book was at 43% at the end of Q2FY21, but so far in Q3FY21, L&T has secured high-speed rail (HSR) contracts worth Rs 320 bn and other large orders that are all multilateral funded. These increase the share of multilateral funding to >50% and provide increased visibility of both future execution and collections.
Working capital levels to improve in Q4FY21; however, we expect commodity headwinds: We estimate that Rs 16 bn of advances from high-speed rail (HSR) orders are to be received in Q4, which should lead to improvement in core NWC levels. However, a near-term rise in steel prices may lead to commodity-linked margin impact in H2FY21 (50% of order book of fixed price contracts).
Government thrust on infra and liquidity easing measures to benefit L&T: We estimate Rs 74 trn of capex over FY20-25 from the National Infra pipeline (NIP) based on significant share of projects securing financing. Further liquidity infusion measures by the Centre provide relief to L&T’s suppliers and contractors, which should aid execution in H2FY21. Trading at 16.3x FY22F EPS of Rs 76.6; maintain Buy with TP of Rs 1,510
The relatively sharper decline in L&T has led to core valuations being at decade lows despite L&T being relatively more asset-light than it was in FY12. Core PE and EV/Ebitda are significantly lower than past averages and significantly below FY11-14 levels, when the industry was in a slowdown.
We raise FY22F/23F EPS by 3% to account for stronger order inflows and associated rise in execution. We value L&T on an SOTP basis on Dec-22 estimates to arrive at our TP of Rs 1,510, implying 21% upside, and maintain our Buy rating.
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