EUR 120.00 For Business Accounts Only

MOSL: LARSEN & TOUBRO (Buy)-Rightly placed to benefit from macro improvement

LARSEN & TOUBRO: Rightly placed to benefit from macro improvement

(LT IN, Mkt Cap USD30.2b, CMP INR1595, TP INR1950, 22% Upside, Buy)

 

• L&T remains best story to play capex upcycle: L&T's core E&C business remains best placed to benefit from any capex upcycle, supported by its leaner asset-light business model and diversified segments. Therefore, although the Buildings and Power segments were weaker in FY21, this was largely offset by strong orders from the international Power T&D and Hydrocarbons segments. L&T's capability to win large ticket size projects, such as airports and high-speed rail (HSR), has been remarkable and has compensated for its exit from the Roads sector.
• Business model only strengthens in past few years; await macro upturn: Since its last five-year plan announced in 2016, L&T has been strengthening its business model by exiting non-core businesses, going asset-light (no exposure to road HAMs), and sharpening its focus on receivables rather than just execution. L&T continues to maintain high liquidity on its balance sheet. On account of the pandemic, order inflows have been weaker, especially if adjusted for a one-time big ticket size order (HSR project) and weak state finances. However, things should start to improve as we move past the pandemic. In fact, surprisingly, other capital goods stocks are factoring in strong order inflows over the next 3-5 years and trading at elevated multiples, while L&T's stock has been an underperformer, especially when adjusted for subsidiary valuations. We do not see any strong fundamental reasons to justify such a stark difference in stock price performance.
• Catalysts to watch out for: Over the next two years, we see multiple catalysts emerging for L&T, including (a) asset monetization for Hyderabad Metro and Nabha Power, (b) FCF generation of USD1.5-2.0b p.a. in the core business, (c) an improvement in order inflows prior to the elections, and (d) improved execution, aided by a better working capital cycle - as the government focuses on capex towards economic growth and job creation. If the macro improves, the strong FCF generation should enable L&T to hike dividend payouts as there is hardly any capex requirement beyond the maintenance capex.