In a recent report, Jefferies maintains its Buy rating on Larsen & Toubro (L&T), presenting a revised price target of Rs 4,135 per share, compared to the earlier Rs 4,200. The valuation is based on core Engineering & Construction (E&C) at 18x FY26E EV/EBITDA, considering consolidated PB of 5.4x and PE FY26E at 27.9x.
Anticipating substantial growth, Jefferies foresees a 26% CAGR in core E&C EBITDA for FY23-26E, a notable increase from the 16% observed in FY15-19 when the company traded at 12x EV/EBITDA.
The 3QFY24 results exceeded expectations, with EBITDA surpassing estimates by 2%, and order flow exhibiting an impressive 25% YoY growth. L&T’s management raised the FY24E order flow guidance to over 20% YoY growth, up from the earlier estimate of 12%. The prospect pipeline also demonstrated a robust 29% YoY increase.
Despite these positive indicators, the core E&C margin witnessed a slight decline, down by 70 bps YoY in 3Q, settling at 7.7%. Jefferies acknowledges this and adjusts the EBITDA by 2-3% for FY24E-26E to reflect the impact.
The revised PT of Rs4,135, slightly lower than the previous Rs4,200, accounts for the margin adjustment. Jefferies remains optimistic about the stock’s upward trajectory, citing strong order flow traction in the next 12 months.
However, the report highlights potential risks, including concerns about prudent capital allocation and a potential reduction in government infrastructure spending focus.
