Green Hydrogen Incentives And Intelliswift Acquisition Will Strengthen Future Prospects

Key Takeaways

• Strong order inflow and performance across various sectors are likely to positively impact L&T's revenue growth in upcoming quarters.
  
• Strategic acquisitions, deal wins, and incentives in green technologies position L&T to potentially improve long-term revenue streams and margins.
  
• Economic slowdown and reduced investments could hinder Larsen & Toubro's revenue growth amidst rising international costs and execution challenges.

Catalysts

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

• The company posted the highest ever order inflow, which was supported by strong performance in Infrastructure, Hydrocarbon, CarbonLite Solutions, and Precision Engineering & Systems businesses. This is likely to impact revenue growth positively in the coming quarters.
  
• L&T Energy Green Tech Limited secured incentives under the green hydrogen production PLI scheme. As these incentives are distributed over time and contingent on market developments, they may contribute to improving net margins as the market for green hydrogen evolves.
  
• LTIMindtree and L&T Technology Services recorded their highest ever deal wins, including a significant USD 500 million deal. This signifies a strong future revenue pipeline, and successful execution could lead to enhanced earnings.
  
• The acquisition of Intelliswift and its offerings in software product development and platform engineering is expected to enhance L&T's service offerings, thereby potentially improving long-term revenue streams and net margins.
  
• Improvement in net working capital to revenue ratio from 16.6% to 12.7%, driven by strong customer collections, indicates better financial management and may result in increased cash flow, positively affecting future earnings.

Larsen & Toubro Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Larsen & Toubro's revenue will grow by 13.9% 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 ₹266.2 billion (and earnings per share of ₹193.37) by about March 2028, up from ₹138.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹198.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 33.0x today. This future PE is greater than the current PE for the GB Construction industry at 19.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.18%, as per the Simply Wall St company report.

Larsen & Toubro Future Earnings Per Share Growth

Risks

• The growth momentum of the Indian economy has waned due to reduced urban consumption, slowing formal sector wages, and tightened lending norms, which could lead to lower domestic revenue for Larsen & Toubro.
  
• Public investments have slowed due to recent elections, and private investments have been episodic, potentially affecting future order inflows and revenue growth.
  
• The global landscape features military conflicts and trade wars, which could reignite inflation and limit central banks' policy choices, negatively impacting international project costs and margins.
  
• The decline in the order prospects pipeline by 12% compared to the previous year, particularly due to the fall in Hydrocarbon and CarbonLite prospects, could result in lower order inflows and future revenue.
  
• Challenges in project execution due to delayed payments in certain domestic infrastructure projects could affect revenue recognition and working capital management.

Valuation

• The analysts have a consensus price target of ₹4092.242 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 ₹4600.0, and the most bearish reporting a price target of just ₹2650.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹3730.9 billion, earnings will come to ₹266.2 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 15.2%.
• Given the current share price of ₹3318.8, the analyst price target of ₹4092.24 is 18.9% higher.
• 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.