A drop in commodity prices, especially steel, will boost Larsen & Toubro Ltd.’s operating margin in the remaining quarters of the ongoing fiscal, according to analysts.
While improved project executions aided Q1 growth, the trend of higher project awards as a ratio of projects tendered post-Covid will be an additional trigger in the coming quarters, the analysts said in their research reports.
India’s largest engineering-to-construction company reported a 22% year-on-year increase in revenue to Rs 35,853 crore in the three months ended June, in line with consensus analysts’ estimate.
L&T Q1 FY23 Highlights (YoY)
Net profit rose 49.7% to Rs 2,293 crore.
Operating profit dropped 2% to Rs 3,120.6 crore.
Operating margin stood at 8.7% against 10.8% a year ago.
Shares of L&T rose as much as 3.6%, the most in more than two weeks, as of 10:50 a.m. on Wednesday. The stock had closed 1.76% lower before the results were announced on Tuesday.
The trading volume was quadruple the 30-day average. The stock has moved above the 200-day simple moving average, indicating potential upward price momentum. Of the 41 analysts tracking the company, 40 recommend a ‘buy’ and one suggests a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 10.8%.
Here’s what analysts have to say about L&T’s Q1 FY23 results.
Jefferies
Revenue and Ebitda were 11% and 10% above expectations.
Order flow was strong with 57% YoY growth, driven by both domestic and international segments.
Prospect pipeline is down 15% YoY, but management maintained its 12-15% YoY order flow and revenue growth guidance.
L&T should continue to benefit from execution and margin recovery as negative impact of supply disruptions and sharp rise in commodity prices in fourth quarter have eased.
Working capital and cash generation focus of the company remains. First quarter is a seasonally weak quarter for collections versus fourth quarter, however, sequential deterioration is not a concern.
Management maintained its FY23 guidance of 20-22% of sales with an endeavour to end at 20%.
Nomura
Order inflow prospects robust for remaining FY23.
Working capital also appears in check.
Drop in commodity prices to aid margins from Q2 FY23.
Ebitda margin expected to rebound from Q2 FY23 as commodity prices have corrected sharply.
Factors 20 basis points higher core Ebitda margin for FY23 as commodity prices corrected.
Management has retained its core Ebitda margin guidance at 9.5% for FY23, as commodity prices have eased.
Key commodities like steel may remain weak in the near term and as a result core margins may improve mainly resulting from a fall in steel prices. L&T’s current order book has around 33% fixed-price contract.
HDFC Securities
L&T reported in-line performance in Q1 FY23, with revenue/Ebitda/PAT beating estimates marginally.
Execution improved for infra, heavy engineering and IT&TS business during the quarter. However, tapering of shipbuilding jobs impacted defence business execution.
The finance cost reduced to Rs 760 crore down 8.6% YoY due to reduced borrowing cost in the financial services business and refinancing of metro debt.
The company looks to sell its stake in Infrastructure Development Projects Ltd. and Nabha Power Project and bring in strategic investor for its metro project.
Given L&T’s record high order book of Rs 3,60,000 crore; improving health of Hyderabad metro project; and revival in private capex, we maintain ‘buy’. However, we reduce the SOTP-based target price to Rs 2,135 apiece largely on account of realignment in IT subsidiary valuation.
Key risks include raw material cost inflation, supply-chain bottlenecks, talent management and lacklustre private capex.
Emkay Global Financial Services
Reported a PAT of Rs 1,700 crore for Q1 FY23, slightly below estimates on the back of lower Ebitda margin in the infrastructure segment.
Revenue was up 22% to Rs 35,900 crore, driven by 36%/30% growth in Infrastructure/IT segments.
Order inflow ex-services stood at Rs 28,000 crore—up 85% YoY.
Order prospects currently stand at Rs 7,60,000 crore and the company is hopeful of achieving its guidance of 12-15% growth as it has been selective in bidding.
The order book at the end of the quarter stood at Rs 3,60,000 crore, with infrastructure/energy/hi-tech manufacturing segments contributing 73%/18%/5%, respectively.
In a bid to improve profitability, the company is looking to exit its non-core assets such as IDPL and Nabha Power, and to cut stake in the Hyderabad metro.
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