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Business News/ Markets / Mark To Market/  L&T’s IT arms drive valuations, but order inflows matter more
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L&T’s IT arms drive valuations, but order inflows matter more

With the lockdowns easing, the private sector capex spends are expected to accelerate

Investors are also optimistic that L&T would benefit in a big way from the National Infrastructure Pipeline opportunity of ₹111 trillion announced by the government (Photo: Reuters)Premium
Investors are also optimistic that L&T would benefit in a big way from the National Infrastructure Pipeline opportunity of 111 trillion announced by the government (Photo: Reuters)

Larsen and Toubro Ltd’s technology subsidiaries are proving to be worth quite a fortune for it. With the IT stocks of L&T Infotech, L&T Technology Services and MindTree rising between 31% and 39% in the past two months, L&T’s shares are also up about 12%.

While this is good for investors, the Street is now banking on its core engineering & construction business to drive earnings in the coming years.

Optimism around a pickup in order inflows is high. Covid-19 saw many companies limit their capital expenditure plans. However, with the lockdowns easing, the private sector capex spends are expected to accelerate.

Bucking the trend
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Bucking the trend

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

Further, with oil prices stable, an increase in orders from the Middle East in the hydrocarbon space is on the cards.

“The addressable order pipeline is about 7.2 trillion for FY22, which would be led by infrastructure capex under the National Infrastructure Pipeline. We also see 1.8 trillion of hydrocarbon capex from the Middle East for FY22," said Ankita Shah, vice-president, Elara Securities Ltd.

All in all, this could see L&T’s order book expand to about 3.8 trillion by the end of FY22, points out Shah.

For now, L&T revenue visibility to its order book has been on the rise. Besides, the second covid-19 wave has not impacted the company much in terms of execution.

The management has pointed out that labour availability is near pre-covid levels.

But note that while the order book to revenue has shot up to about 3.5 times, which is one of the highest in a long time, it’s also due to the fact that revenue dipped in FY21.

In fact, execution is expected to pick up significantly this year, which will aid in expanding its cash flows. Analysts have pegged revenue to jump about 15% in FY22, which is good considering the covid impact.

The Street is also betting on asset monetization of its Hyderabad Metro and Nabha Power projects over the next few years. Besides, L&T has been moving out of capital-intensive businesses over the past few years.

Indeed, one factor that can continue to swing the scale in favour of L&T is lower valuations.

“Other capital goods stocks are factoring in strong order inflows over the next 3-5 years and trading at elevated multiples, while L&T’s stock has been an underperformer, especially when adjusted for subsidiary valuations," said analysts at Motilal Oswal Financial Services Ltd in a client note.

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Published: 31 Aug 2021, 11:42 PM IST
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