Larsen and Toubro: Building a Strong Investment Case with ICICI Securities

In the dynamic world of investments, finding opportunities that stand out can be a game-changer. In this article, we explore the research report by ICICI Securities, a respected name in the financial industry, regarding Larsen and Toubro (L&T). ICICI Securities’ report, dated September 8, 2023, not only recommends a buy rating for L&T but also sets a target price of Rs 3141. Let’s delve into why ICICI Securities is bullish on this iconic company.

Impressive Order Book Growth of Larsen and Toubro

Key Contract: L&T has emerged as the preferred contractor for a substantial USD 3.9 billion order for the Jafurah Unconventional Gas Field in Saudi Arabia. This achievement reflects the company’s prowess on a global scale.

Robust Order Inflow: In FY24 thus far, L&T has announced orders exceeding INR 750 billion. This significant accretion in orders positions L&T to potentially report over 20% growth in order inflow for Q2, excluding services. This performance signals a strong demand for its services.

Improved Order Prospects: L&T has conveyed an improvement in order prospects, particularly from the Middle East hydrocarbons sector. This positive shift has bolstered confidence in the company’s outlook.

Shareholder-Friendly Initiatives

Share Buyback: L&T’s renewed focus on rewarding minority shareholders is evident in its announcement of a substantial buyback plan in Q1FY24. This move not only demonstrates the company’s commitment to shareholders but also adds value to their investments.

Improved Return on Equity (RoE)

RoE Enhancement: ICICI Securities anticipates that L&T’s RoE is likely to improve by 200 basis points in the medium term. This improvement is a testament to the company’s efforts in enhancing its financial performance and shareholder returns.

Outlook and Conclusion

In conclusion, ICICI Securities upgrades its rating on L&T to BUY. The key drivers for this upgrade include strong consecutive order inflow for two quarters (Q1 and Q2FY24), which could potentially result in surpassing the order inflow guidance for FY24. Additionally, the significant buyback initiative and expected margin improvement in Q4 and FY25E contribute to this positive outlook.

Investment Potential: The target price of INR 3,141, based on a Sum of the Parts (SOTP) valuation assigning 30x FY25E to the Engineering, Procurement, and Construction (EPC) business, signifies ICICI Securities’ confidence in L&T’s growth prospects.

As you navigate the intricate landscape of investments, consider Larsen and Toubro as a cornerstone of your portfolio. With its remarkable order book growth, shareholder-friendly initiatives, and improving RoE, this company has the potential to construct a solid foundation for your investment journey.

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