Renewable Energy And Tech Expansion May Drive Future Success

Key Takeaways

• L&T's focus on renewable energy and low-carbon solutions may drive future revenue growth and improve earnings margins.
  
• Diversification into high-growth sectors like semiconductors and data centers suggests potential for increasing future revenues and profitability.
  
• Macroeconomic headwinds, unfavorable terms, and geopolitical risks may hamper Larsen & Toubro's revenue growth and margins, while subsidy conversions could impact cash flows.

Catalysts

Engages in engineering, construction, and manufacturing operations in India and internationally.

• Larsen & Toubro has established a separate business vertical for renewable energy to capitalize on growth opportunities in the renewables segment, indicating potential future revenue growth.
  
• The company is positioning its CarbonLite Solutions to play a pivotal role in energy transition, likely improving future earnings by focusing on high-margin low-carbon solutions.
  
• Significant order inflows and a strong pipeline in sectors like infrastructure and hydrocarbons could drive future revenue growth and improve net margins through increased operational efficiencies.
  
• Expansion into semiconductor design and development signals L&T's strategy to capture future revenue streams in a high-growth technology sector, potentially improving earnings.
  
• The growing data center business, with major upcoming projects in Chennai and Bangalore, is poised to boost future revenues and profitability as demand for data center capacity increases.

Larsen & Toubro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Larsen & Toubro's revenue will grow by 12.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 7.1% in 3 years time.
• Analysts expect earnings to reach ₹244.3 billion (and earnings per share of ₹176.11) by about December 2027, up from ₹134.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹276.7 billion in earnings, and the most bearish expecting ₹202.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.4x on those 2027 earnings, down from 40.1x today. This future PE is greater than the current PE for the GB Construction industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.51%, as per the Simply Wall St company report.

Larsen & Toubro Future Earnings Per Share Growth

Risks

• The company's order inflow guidance assumes a higher conversion rate of prospects into orders, which might not materialize due to macroeconomic headwinds, thereby impacting revenue growth.
  
• In the thermal power sector, L&T has chosen to limit its participation due to unfavorable contracting terms, which could restrict potential revenue streams from this sector.
  
• Although L&T maintains a strong pipeline for international projects, fixed-price contracts present a risk of margin compression if projects face unexpected cost escalations, impacting net margins.
  
• There are concerns about state governments converting part of state revenues into subsidies, which could delay payments for infrastructure projects, negatively affecting working capital and cash flows.
  
• While the company's international order book is growing, there is an increased risk of geopolitical instability, especially in the Middle East, which could disrupt projects and impact earnings.

Valuation

• The analysts have a consensus price target of ₹4037.18 for Larsen & Toubro based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹4550.0, and the most bearish reporting a price target of just ₹2946.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹3455.4 billion, earnings will come to ₹244.3 billion, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹3916.0, the analyst's price target of ₹4037.18 is 3.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.