Larsen & Toubro (L&T) is still rated as a buy by Jefferies, according to a recent report. The company has modified its price target from Rs 4,200 to Rs 4,135 per share. Based on core Engineering & Construction (E&C) at 18x FY26E EV/EBITDA, the valuation takes into account consolidated PB at 5.4x and PE FY26E at 27.9x.
A significant increase from the 16% recorded in FY15-19, when the company traded at 12x EV/EBITDA, is anticipated by Jefferies, which projects a 26% CAGR in core E&C EBITDA for FY23-26E.
The 3QFY24 results were better than anticipated, with order flow showing an amazing 25% YoY growth and EBITDA exceeding estimates by 2%. The management of L&T increased the order flow guidance for FY24E from the previous estimate of 12% YoY growth to over 20% YoY growth. Additionally, the prospect pipeline showed a strong 29% YoY increase.
In 3Q, the core E&C margin saw a slight decline of 70 bps YoY, settling at 7.7%, despite these encouraging signs. Recognizing this, Jefferies modifies the EBITDA for FY24E–26E by 2-3% to account for the impact.
The margin adjustment is accounted for in the revised PT, which is now Rs4,135, slightly less than the previous Rs4,200. Jefferies is still positive about the stock’s future direction, predicting robust order flow over the next 12 months.
The report does, however, draw attention to some possible hazards, such as worries about wise capital allocation and a possible shift away from government spending on infrastructure.
