L&T Shares Drop Despite Bullish Brokerage Reviews

Here’s what analysts made of L&T's Q4 performance:

CLSA

• Maintains ‘buy’ rating, but cuts target price from Rs 1,850 to Rs 1,800 apiece.
• Backlog growth of 8% YoY, a pick-up in core engineering and construction execution to 10% YoY, 79-basis-point expansion in its core E&C margin and a 66% rise in cash flow operations leading to 150 basis points lower net working capital were the highlights from L&T’s Q4 results.
• “E&C execution was weaker than our estimate on regional lockdowns.”
• Good news was its infrastructure segment margin expanded 37 basis points in FY21.
• Worker migration during the second wave of the lockdown is not as high as last year, but ramp-up is delayed and it now looks for an execution pick-up from Q2FY22 with its solid $45-billion book.
• FY22 guidance is realistic, at low-to-mid-teen growth in inflow and execution with a flat margin.

HDFC Securities

• Maintains ‘buy’ rating, increases target price to Rs 1,800 from Rs 1,657 apiece earlier.
• Improvement in Ebitda margin and strong cash collections were the key positives from the result.
• With improving macro in international markets and government’s focus on infrastructure at home, L&T is hopeful of low to mid-teens growth in order inflow.
• Strong order book, healthy balance sheet, and robust services business are key reasons for ‘buy’ rating.
• Recovery in key international markets, continuous focus on infrastructure by the government, and rebound in crude oil prices augur well for L&T
• With core business requiring limited investment, L&T may reward its shareholders with higher dividends.
• Key risks: Delay in asset monetisation and tepid order inflows.

Motilal Oswal

• Maintains ‘buy’ rating with a target price of Rs 1,700 apiece.
• L&T’s consolidated adjusted profit after tax, and in the core E&C segment beat estimates.
• Balance sheet improvement was a huge positive. This was driven by completion of the sale of the electrical and automation business and working capital cycle improvement to 22.3% of sales from 23.7%.
• FY21 brought out the core strengths of the L&T’s re-aligned business model as a pure EPC player, even though P&L was impacted.
• While the current order book stands strong with order book/revenue ratio of 3.5x being the highest in many years, the ordering momentum becomes a key monitorable going forward.
• Margin surprise led to earnings beat, working capital cycle improves.
• L&T has rightly prioritised its balance sheet strength over growth during the second Covid wave.

Jefferies

• Maintains ‘buy’ rating, raises target price to Rs 1,800 from Rs 1,745 apiece.
• Ebitda in Q4 was 5% lower than expectations given lower revenue.
• Low to mid-teens (13-17%) growth guidance for FY22 revenue and order flow with stable margins reflects realism on the second wave impact and recovery optimism from it in the second half of the fiscal.
• Lowers FY22E-23E EPS by 3-8% to reflect second wave impact and believes L&T is on a re-rating path.
• “Our only disappointment was when management to our specific question mentioned divestiture of L&T Finance is not on their mind for now.”
• FY21 domestic order book is 79% vs 75% YoY, driven by the high-speed rail project. This augurs well for margins ahead as international projects tend to have lower margins.
• Key risks include management not following prudent capital allocation and government infrastructure spend not reaching pre-Covid levels and growing.

ICICI Securities

• Maintains ‘buy’, cuts target price to Rs 1,670 from Rs 1,684 apiece.
• Strong balance sheet, focus on asset sales, state and central governments’ investment towards building infrastructure and creating jobs post normalisation of the pandemic situation are key reasons for ‘buy’ rating.
• Focus on asset sales, especially Nabha Power and Hyderabad Metro, will boost cash flows in the medium to long term.
• Advent of second Covid-19 wave has brought uncertainty on growth and order intake fronts in the near term; however, L&T expects the situation to normalise Q2FY22-end onwards.
• Low ridership at Hyderabad Metro is continuing to impact overall cash flows.
• Due to the spread of pandemic equally to rural hinterlands, the exodus of migrant labourers has been limited and the company is ensuring care and proper hygiene, etc. to limit any major movement as was witnessed in FY21.

Nomura

• Maintains ‘buy’ rating, raises target price from Rs 1,616 to Rs 1,654 apiece.
• Cuts FY22 profit after tax estimates by 2% on near-term execution headwind in Q1 of FY22; strong order book and higher services drive growth into FY23.
• Despite potential execution impact in Q1 FY22 due to pandemic-linked restrictions, management’s guidance of 18% year-on-year revenue growth in FY22 is realistic on a weak FY21 base.
• Expects commodity prices to impact core Ebitda by 210 basis points in FY22, partially offset (120bp) by completion of loss-making orders in FY21, productivity gains.
• Strong delivery on cash flows to continue into FY22F as net working capital levels stabilise.
• Hyderabad Metro might continue to be a drag.