Markets
Will L&T become the world’s favourite Indian stock?
Summary
- How sticky is L&T’s business? And will it be successful in becoming the next wealth creator like HDFC? Read on to find out…
HDFC was one of the top wealth creators in the Indian share market. It had a rock-solid balance sheet, close to zero non-performing assets (NPA), and the company doled out consistent dividends even during times of distress.
Not to mention its resilience stock price performance.
After its merger with HDFC Bank, the latter now has a large balance sheet, lower unsecured loans, and a vast customer base.
Investors didn’t need to look elsewhere when they needed to rely on a stable business . Multiple factors made HDFC an investor's favourite stock.
The question is which stock would be the heir apparent to HDFC now that the company has stopped trading after its merger with HDFC Bank?
One company that we could think of that has ranked high across parameters is Larsen and Toubro (L&T).
Let’s do a deeper analysis of the company and see how it’s preparing itself for the next leg of growth.
Business Overview of L&T
L&T was established in 1946 as a manufacturing company producing dairy and allied equipment. It then expanded into repairing ships and construction.
Today, the company is the most respected multinational conglomerate that operates in over 50 countries with unmatched capabilities in all its businesses, including construction, engineering, technology, and manufacturing.
L&T has over the years forayed into multiple business verticals, including infrastructure, power, hydrocarbon, metal and minerals, defence, aerospace, information technology (IT), products, systems and equipment, finance, and real estate.
Although the company has a presence in multiple sectors, L&T is synonymous with construction, EPC (Engineering Procurement and Construction) projects, and manufacturing.
L&T’s Core Business
L&T is ranks among the top contractors across the world. It executes turnkey projects with innovative design engineering for key sectors of the economy.
The company has built high-speed rail, metros, road bridges, railway bridges, dams, tunnels, ports, shipyard structures, water treatment plants, transmission lines, underground cable networks, airports, data centres, and hotels, across the world.
At the end of the September 2023, the company had the highest-ever order book of ₹4.5 trillion (tn). The order book grew by 72% year-on-year (YoY) the highest-ever growth for the company driven by the ultra-mega orders fin hydrocarbon segment.
A cumulative order book of ₹4.5 tn is something few top private sector engineering companies in India can boast of.
The company’s in-house design, engineering, and, importantly, fabrication capabilities for critical equipment and systems, give it a robust competitive advantage.
Investors always consider L&T as a proxy for India's infrastructure story.
Although the EPC business continues to hold utmost importance to the company, it has expanded its wings in the services business, which ranked second in terms of revenue.
L&T, via its subsidiary, has been offering IT services and solutions for over 25 years. It offers multiple services such as data analytics, cloud-based transformation, digital consulting, and cyber security solutions to its clients all across the world.
With the merger of LTI and Mindtree, LTIMindtree became the sixth-largest Indian IT firm and has a diversified services portfolio through which it can serve its diversified client base across end-to-end industry value chains.
L&T’s Commitment to Sustainability
L&T is currently leading the green revolution in India by playing a significant role in the renewable energy sector.
L&T recently announced its foray into green hydrogen space and plans to create renewable energy infrastructure for the world's largest green hydrogen plant in Saudi Arabia.
The project is a collaboration between NEOM Green Hydrogen Company (NGHC), a joint venture between ACWA Power, Air Products, and NEOM.
It entered into a joint venture with Indian Oil Corporation (IOC) and renewable power company ReNew for its green hydrogen ventures.
The company also announced it will invest US$ 4 billion (bn) ( ₹320 bn) with its partners in its green hydrogen business in the next three to five years.
Given the company’s expertise in implementing energy-efficient designs, water conservation measures, and eco-friendly materials, it demonstrates its commitment to green building practices.
Moreover, it strongly believes that very little can be achieved through standalone sustainable initiatives. Hence, the company went a step ahead to help other companies go green by building water treatment plants, manufacturing electrolysers and storage batteries, and EPC execution of green hydrogen plants.
L&T is not just making the earth a better place but is also operating beyond the planetary boundaries.
L&T on Earth and Beyond…
L&T was first contacted in the 1970s by ISRO (Indian Space Research Organisation) to manufacture certain parts and equipment for its space program.
This marked the beginning of L&T’s journey into the space. From then, L&T was a trusted partner of ISRO and was a part of every mission, including Chandrayaan-1 and 2 and Mangalyaan missions.
It also worked on ISRO’s Aditya-L1 and Gaganyaan missions.
Recently, the company manufactured the critical booster segments that were used in the Chandrayaan-3 mission.
It also bagged a contract to manufacture five Polar Satellite Launch Vehicles (PSLV) for ISRO, which are set to be launched in 2024.
With India's journey into space getting fuelled, L&T would be a primary beneficiary given its 5-decade-long relation with ISRO.
Apart from being an important part of India’s space missions, L&T is an active part of India’s defence industry.
It has partnered with DRDO and the Indian armed forces to develop defence products, systems, and platforms across land, sea and air operations, in line with its commitment to ‘Make in India’.
With growing geopolitical tensions, L&T is helping India strengthen its defence equipment.
While the company is gliding its way towards growth across all its business segments, it has always been future-ready.
L&T – A Company with a Vision Focused on Future Growth
It launched two e-commerce digital platforms, L&T SuFin and L&T EduTech.
L&T SuFin is an integrated digital B2B marketplace for buying and selling industrial and construction products and services, whereas L&T EduTech is a digitally driven learning initiative created to bridge the gap between the knowledge and skills needed by employers and graduates who possess essential attributes.
Both businesses have started to take shape and will be primary beneficiaries when the world's digitalisation drive gathers momentum.
L&T has also forayed into designing for fabless semiconductor chip by setting up a wholly owned subsidiary with an investment of ₹8.3 bn.
Given the shortage for semiconductor chips, L&T’s foray into designing automobile and industrial chips is perfect example of right time and right place.
L&T’s Financial Performance & Valuations
L&T is growing across all its business segments, and the proof lies in its sound financials.
In the last three years, the revenue of the company has grown at a compound annual growth rate (CAGR) of 10%, driven by a high inflow of orders across segments. The net profit also grew at a CAGR of 39.3% on the back of the high-margin EPC business.
Its return on equity (RoE) was 14.2% at the end of financial year 2023, an impressive 8% improvement from three years ago. The return on capital employed (RoCE) also improved and stood at 17.9%.
In the September 2023 results, the revenue grew by 19.9% YoY driven by higher execution momentum in international projects. The net profit also grew at 36.8% YoY.
L&T also pays consistent dividends to its shareholders. It has been paying dividends to its shareholders since 2003. Its five-year average dividend payout is 43.2%, and the current dividend yield is 0.8%.
The company also announced its first buyback in July 2023, where it bought back shares worth ₹100 billion (bn) from its shareholders.
Coming to valuation metrics, the company is trading at a price-to-earnings (P/E) multiple of 36.5x, and a price-to-book value (P/BV) multiple of 4.5x.
This is slightly higher than the industry average P/E and P/BV of 22.4x and 2.6x. However, when compared to the five-year average P/E (22.8x) and P/BV (2.7x), the shares are trading on par with the industry average.
To Conclude
A diversified presence across multiple key sectors is helping L&T scale to new heights every year. This is also reflected in its performance on the bourses over the years.
In the past three decades, the company’s shares grew at a CAGR of 26.4%, whereas the benchmark index BSE Sensex saw a growth (CAGR) of 16.5% during the same time.
L&T has guided for a 12-15% growth in order inflows in the coming decade.
With a favourable government tender conversion ratio (to orders) and a five-year low quantum of domestic share of order backlog at 73%, the company is expected to have a reasonable share of revenues coming from pending order book in the next decade.
With the traction in order book and higher margins in the new revenue segments, the company also sees its return on equity nearly double in the next 5 years.
Given the scale at which the company is growing across all its businesses, sound financials, and good growth prospects, we won’t be surprised to see L&T continue its good run for a long time to come even at a slightly higher end of valuations.
Happy Investing!
Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
