Engineering powerhouse Larsen & Toubro (L&T) reached a significant milestone on September 7th, with its market capitalization crossing the INR 4 lakh crore mark. This achievement followed a surge in L&T’s share price, driven by the company’s remarkable win of a contract for Saudi Aramco’s Jafurah unconventional gas development project, valued at nearly $4 billion.
As L&T joins the elite club of companies boasting a market cap exceeding INR 4 lakh crore, it finds itself in the company of giants like Reliance Industries Ltd, TCS, HDFC Bank, Infosys, ICICI Bank, HUL, ITC, LIC, SBI, Bharti Airtel, Bajaj Finance, Adani Energy Solutions, Adani Green Energy, Adani Enterprises, Kotak Mahindra Bank, and Adani Total Gas. On September 7th, L&T’s stock surged to a fresh record high of INR 2854.95 per share.
Analyst Optimism Prevails
Market analysts have largely remained optimistic about L&T’s growth prospects, leading to upward revisions in the stock’s price targets. Citi, for instance, has maintained its ‘buy’ rating while raising the target price to INR 3,175 from INR 2,889.48. CLSA has also upheld a ‘buy’ rating, increasing the target price to INR 3,240, while Morgan Stanley maintains an ‘overweight’ rating with a target price of INR 2,935 per share.
The significance of this Saudi Aramco contract is not lost on industry experts. According to Morgan Stanley, this order represents a substantial portion of L&T’s annual guidance, accounting for 13 percent of its projected growth for fiscal year 2024 (FY24), which is expected to be in the range of 10-12 percent. It also constitutes a remarkable 17 percent of the company’s core order inflows. Analysts highlight that potential upside risks for L&T include increased government expenditure, reduced material costs (particularly steel), and an acceleration in economic growth, leading to higher-than-expected private capital expenditures.
Some analysts have pointed out that L&T’s key growth opportunity in FY24 lies in the Middle East hydrocarbon sector, which helps alleviate concerns about a potential slowdown in government orders, particularly in the run-up to the upcoming elections in the fourth quarter of FY24.
CLSA, in its latest note, stated, “By the time orders are placed and EPS gets visible, we expect the stock to re-rate. Hence, we raise our E&C multiple to 25x vs 24x.”
Hydrocarbon Sector Expansion
In the first quarter, L&T’s hydrocarbon prospect list reached INR 3.47 lakh crore, a substantial increase from INR 2.44 lakh crore in the fourth quarter of FY23 and INR 1.02 lakh crore in the first quarter of FY23. Notably, around 70 percent of this prospective business is attributed to the Middle East region.
Citi has observed that L&T significantly expanded its growth potential for FY24 following its first-quarter results, primarily driven by the uptick in hydrocarbon prospects. Additionally, L&T’s financial health has seen improvement, with a parent-level surplus of INR 250 billion, a marked enhancement in working capital, and a consistent upward trajectory in consolidated Return on Equity (RoE).
The recently announced buyback of up to INR 10,000 crore, representing approximately 2.4 percent of outstanding shares, at a maximum price of INR 3,000 per share, reflects the company’s confidence in its own prospects. From a medium-term perspective, Citi has reiterated L&T as its top choice.
In conclusion, L&T’s achievement of surpassing the INR 4 lakh crore market cap milestone underscores its robust position in the market, driven by significant contract wins and a favorable growth outlook. The company’s focus on the Middle East hydrocarbon sector and its financial strength continue to instill confidence among analysts and investors alike, making it an attractive choice for those eyeing long-term growth prospects.