L&T’s IT branches raise valuations, but order flow matters more

While that bodes well for investors, the Street is now relying on its core engineering and construction business to drive earnings growth in the coming years.

The optimism about the pickup in order inflows is high. COVID-19 saw many companies limit their capital expenditure plans. However, with the easing of the lockdown, private sector capital expenditure is expected to pick up.

Investors are also optimistic that L&T will benefit in a big way from the National Infrastructure Pipeline opportunity ₹111 trillion announced by the government.

Also, with oil prices stabilizing, an increase in orders from the Middle East to the hydrocarbon sector is on the cards.

“Addressable Order is all about the pipeline ₹7.2 trillion for FY22, which will be led by infrastructure capex under the National Infrastructure Pipeline. we also see ₹1.8 trillion hydrocarbon capex from the Middle East for FY22,” said Ankita Shah, Vice President, Elara Securities Ltd.

Overall, this will expand L&T’s order book by about . can be up to ₹3.8 trillion by the end of FY22, says Shah.

For now, L&T’s revenue visibility is increasing in its order book. Also, the second Covid-19 wave has not impacted the company much in terms of performance.

Management has reported that labor availability is close to pre-Covid levels.

But note that the order book to revenue has grown by around 3.5x, the highest in a long time, also due to the fact that revenues declined in FY21.

In fact, execution is expected to pick up significantly this year, which will aid its cash flow expansion. Analysts have forecast around 15% growth in revenue in FY22, which is good considering the impact of COVID.

Street is also betting on asset monetization of its Hyderabad Metro and Nabha Power projects over the next few years. In addition, L&T has been exiting capital-intensive businesses over the years.

In fact, one factor that could continue to swing the scale in L&T’s favor is lower valuations.

Analysts at Motilal Oswal Financial Services Ltd said, “Other capital goods stocks are factoring in strong order inflows over the next 3-5 years and are trading at higher multiples, while L&T stock has been an underperformer, especially when the valuations are supportive. is adjusted for.” customer note.