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Larsen & Toubro Ltd (NS:): Larsen & Toubro (LT) reported strong performance in Q2FY23, Revenue / EBITDA / PAT beating our estimates by 7/11/21% respectively. Bidding during the quarter was strong; However, awards are muted with the award-to-bid ratio at 34% (compared to 69% in Q1FY23). EBITDA margin, at 11.5%, was stable due to improved performance of financial services and Hyderabad Metro, which saw ridership improve to 355k per day. Metro Hyderabad debt is expected to reduce to INR 70-80bn, from INR 130bn, in 2-3 years, led by INR 30bn of soft loan assistance from the Telangana government and INR 20-25bn from TOD land revenue generation. This will make the project sustainable. Given: (1) peak order book (OB) of INR 3.7tn, with a prospective pipeline of INR 6.3tn for H2FY23; (2) improving the health of the Hyderabad Metro Rail Project; and (3) recovery in private Capex, we maintain BUY and increase TP to INR 2,345/sh (22x core Sep-24 EPS, increased by roll-forward valuation increase and subsidiary valuation recalibration).
Tata Power (NS:): In Q2FY23, Tata Power’s consolidated revenue rose 43% YoY to INR140bn, beating our estimate of INR132bn. Strong operational performance across its regulated, stand-alone (including Mundra), coal SPV and renewables businesses are key fundamentals. EBITDA increased marginally by 5.8% YoY on the back of higher availability at Mundra, increased remanufacturing capacity, and higher efficiency in the distribution business. However, margins declined to 13% in Q2FY23 vs. 17% YoY due to higher coal prices, higher operating costs, and higher Q2FY22 basis on favorable tariff orders for Mundra. Profits improved significantly in Indonesia’s coal business (+111% YoY), led by high coal prices. As a result, consolidated PAT increased by 94.3% YoY to INR8.2bn, which was higher than our estimate of INR6.8bn. CGPL continues to supply power under Section 11 of the Act, under the cost-plus mechanism, and it has been extended till December 2022. CGPL’s discussions on supplementing the PPA with GUVNL are at an advanced stage. We have slightly revised our estimate and SoTP to INR243 as against INR232 earlier factoring in margin recovery in EPC business and reduced loss at Mundra. Therefore, we upgrade our rating to ADD from REDUCE.
Supreme Industries (NS:): We maintain BUY on Supreme Industries (SIL) but lower TP to INR 2,450/share (SOTP-based). Total plastic product volumes grew 9% YoY in healthy volumes across pipes and industrial products. Blended NSR fell 8% QoQ to INR 187/kg, due to lower rubber prices. However, consolidated EBITDA declined by 47/56% QoQ/YoY due to severe inventory losses in Q2 (~INR 11 per kg in H1FY23). For FY23, SIL increased its total volume growth guidance to 20% (on better demand) and lowered its EBITDA margin target to 12-12.5% (on inventory losses). We expect the recent cooling in rubber prices (which is being transmitted) to increase demand.
Larsen & Toubro
Strong all-time performance
Larsen & Toubro (LT) reported strong performance in Q2FY23, revenue/EBITDA/PAT beat our estimates by 7/11/21% respectively. Bidding during the quarter was strong; However, awards are muted with the award-to-bid ratio at 34% (compared to 69% in Q1FY23). EBITDA margin, at 11.5%, was stable due to improved performance of financial services and Hyderabad Metro, which saw ridership improve to 355k per day. Metro Hyderabad debt is expected to reduce to INR 70-80bn, from INR 130bn, in 2-3 years, led by INR 30bn of soft loan assistance from the Telangana government and INR 20-25bn from TOD land revenue generation. This will make the project sustainable. Given: (1) a high order book (OB) of INR 3.7tn, with a prospective pipeline of INR 6.3tn for H2FY23; (2) improving the health of the Hyderabad Metro Rail Project; and (3) recovery in private Capex, we maintain BUY and increase TP to INR 2,345 / sh (22x core Sep- 24 EPS, increase due to roll-forward valuation and recalibration valuation of subsidiaries).
Financial highlights: LT posted revenue of INR 427.6bn (+23%/+19% YoY/QoQ), a pace of 7%. Segment-wise infra projects/energy projects/hi-tech manufacturing/ITTS/FS/development projects/others reported a YoY revenue increase of 39/(7)/4/29/6/15/18%. International sales contributed 37% to revenue. Group EBITDA came in at INR 48.9bn (+22.6%/+23.8% YoY/QoQ), a pace of 11%. EBITDA margin, at 11.5% (11.5%/11.0% in Q2FY22/Q1FY23), was stable due to improved efficiency in FS and improved ridership in Hyderabad Metro. Margins in the projects and manufacturing division were muted at 6.6% (down 170bps YoY), due to the one-time 80-bps impact of tighter costs and the 90-bps impact of unfavorable work mix and cost pressures on some projects. As a result, APAT was at INR 22.3bn (+29.4%/+31% YoY/QoQ, a pace of 21%). LT has revised guidance of 12-15% YoY revenue growth in FY23 (strong bias to the upside), with EBITDA margins in projects and manufacturing businesses at 9.5% (maintained).
strong command; High OB records: LT registered an order inflow (OI) of INR 519bn in Q2FY23 (+23%/+24% QoQ YoY), with 67% coming from the domestic market. OB at the end of Sep-22 stood at a record high of INR 3.7tn, with infrastructure at 72%, constituting its major share, followed by energy at 19% (Hi-tech manufacturing at 5% and others at 4%. ). By geography, domestic orders contribute 72% to OB.
Strong Balance Sheet: Net D/E increased to 0.89x from 0.82x at the end of June 22. NWC ratio to sales was stable at 20.9%. LT led FY23 NWC to a sales range of 20-22%. Capex in traditional business is expected to be INR 25-30bn every year while overall Capex in new business of data centers, electrolyzers, and storage batteries is expected to be around INR 70-75bn.
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