Raise FV on L&T by 8% to Rs 1,410 on order buoyancy

The telling step-up. Last three years of healthy ordering has strengthened the backlog of L&T and the sector. It has tested the ability of competition to scale up and benefitted L&T through recent share gains. The focus should now shift on L&T’s ability to execute and reap pricing gains more than on the impending plateauing of new orders. We increase the FV by 8% to Rs 1,410 on recent buoyancy in orders and roll-forward.

L&T has benefitted from the past three years of healthy ordering. Over FY2019-21, the ordering levels would average ~1.4X FY2020 sales and backlog would move up to ~3.3X FY2020 sales. The past three years have seen support on large-sized orders (>Rs 25 billion) spanning across most key business segments of L&T – transportation infrastructure, power, hydrocarbon, water. These accounted for >45% of quantum of domestic orders booked. The last of the three-year period has been telling as it reflected inability of L&T’s peers to scale up capacities, partly on account of lack of support from lenders. L&T has cashed in meaningfully, winning most of the large orders it has bid.

Large order wins over a three-year period should ideally set L&T up for a sweet 2-3-year period of execution. Larger orders typically are supportive of speedier execution as L&T can deploy more of its resources to such select projects. Several such large orders further improve L&T’s ability to sustain good execution levels as it limits impact of project-specific risks. We look forward to L&T’s ability to scale up its Rs 1 trillion FY2020 revenues to Rs 1.4 trllion by FY 2024. We also envisage pricing gains from incremental order wins for L&T as peers of L&T are high on backlog and are going slow of expanding capacities. Do read the interview of L&T’s CFO in such a context.

With support from several large orders finalised over the past three years and benefits of share gains for L&T in FY 2021, we note prospects of FY2022 ordering hovering around FY2020 levels. The National Rail Plan suggests lull in high-speed rail corridors beyond the current Mumbai-Ahmedabad prospect. Key refinery orders may get formally ordered in the second half of FY2021 (L&T is L1 in a couple of them). Large airport orders may also be limited to Chennai and Kolkata.