Performance review for Larsen & Toubro, Tata Power and Supreme Industries| Roadsleeper.com
Larsen & Toubro Ltd (NS:): Larsen & Toubro (LT) reported strong performance in Q2FY23, with revenue/EBITDA/PAT beating our estimates by 7/11/21% respectively. Bidding during the quarter was strong; However, allotment was muted with the allotment to tender ratio at 34% (vs. 69% in Q1FY23). EBITDA margin, at 11.5%, was stable due to improved performance in financial services and Hyderabad metro, which saw ridership improve to 355,000 per day. Hyderabad Metro debt is expected to come down to INR 70-80 billion, from INR 130 billion, in 2-3 years, led by INR 30 billion in soft loan support from the Telangana government and INR 20-25 billion from TOD land revenue. This should make the project self-sustaining. Given: (1) the record order book (OB) of INR 3.7tn, with a prospect pipeline of INR 6.3tn for H2FY23; (2) improve the health of the Hyderabad metro project; and (3) revival in private investment, we maintain BUY and raise TP to INR 2,345/sh (22x core Sep-24 EPS, increase driven by valuation going forward and recalibration of subsidiary valuation).
Tata Power (NS: ): In Q2FY23, Tata Power’s consolidated revenue rose 43% YoY to INR 140 billion, beating our estimate of INR 132 billion. Strong operational performance in its regulated, standalone (including Mundra), coal SPV and renewables businesses were the key fundamentals. EBITDA increased marginally by 5.8% compared to the same quarter last year, thanks to higher availability at Mundra, increased capacity in renewable energy and higher efficiency in distribution operations. However, the margin narrowed to 13% in Q2FY23 compared to 17% YoY due to higher coal prices, increased operating expenses and higher Q2FY22 based on favorable tariff order for Mundra. Profits improved significantly in the Indonesian coal business (+111% y-o-y), led by high coal prices. Accordingly, consolidated PAT increased by 94.3% YoY to INR 8.2 billion, which was above our estimate of INR 6.8 billion. 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 discussion on supplementary PPA with GUVNL is at an advanced stage. We have marginally revised our estimates and SoTP to INR243 vs INR232 previously taking into account margin recovery in its EPC business and loss reduction at Mundra. Therefore, we are upgrading our rating to ADD from REDUCE.
Supreme Industries (NS:): We maintain BUY on Supreme Industries (SIL) but cut TP to INR 2,450/share (SOTP based). Total plastic products volume increased 9% year-over-year on healthy volume across pipes and industrial products. Blended NSR declined by 8% QoQ to INR 187/kg, due to falling resin prices. However, blended unit EBITDA fell 47/56% QoQ/YoY on heavy inventory losses in Q2 (~INR 11 per kg in H1FY23). For FY23, SIL has 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 resin prices (which is being carried forward) to increase demand.
Larsen & Toubro
Strong all-round performance
Larsen & Toubro (LT) reported strong performance in Q2FY23, with revenue/EBITDA/PAT beating our estimates by 7/11/21% respectively. Bidding during the quarter was strong; However, allotment was muted with the allotment to tender ratio at 34% (vs. 69% in Q1FY23). EBITDA margin, at 11.5%, was stable due to improved performance in financial services and Hyderabad metro, which saw ridership improve to 355,000 per day. Hyderabad Metro debt is expected to come down to INR 70-80 billion, from INR 130 billion, in 2-3 years, led by INR 30 billion in soft loan support from the Telangana government and INR 20-25 billion from TOD land revenue. This should make the project self-sustaining. Given: (1) the record order book (OB) of INR 3.7tn, with a prospect pipeline of INR 6.3tn for H2FY23; (2) improve the health of the Hyderabad metro project; and (3) revival in private investment, we maintain BUY and raise TP to INR 2,345/sh (22x core Sep-24 EPS, increase driven by forward valuation and subsidiary valuation recalibration).
Financial highlights: LT reported revenue of INR 427.6 billion (+23%/+19% YoY/QoQ), a pace of 7%. Segment wise Infra Projects/Energy Projects/High Tech Manufacturing/ITTS/FS/Development Projects/Other reported revenue growth of 39/(7)/4/29/6/15/18% YoY. International sales contributed 37% to revenue. Group-level EBITDA came in at INR 48.9 billion (+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 performance in FS and improved ridership in Hyderabad metro. Margin in the projects and manufacturing division moderated to 6.6% (down 170 bps y-o-y), due to a one-time 80 bps impact of final cost and a 90 bps impact of unfavorable job mix and cost pressures in some projects. Accordingly, APAT stood at INR 22.3 billion (+29.4%/+31% YoY/QoQ, a 21% beat). LT has restored its guidance of 12-15% growth in revenue from FY23 (strongly skewed towards the upper range), with a project and manufacturing EBITDA margin of 9.5% (maintained).
Strong order; record high OB: LT recorded an order intake (OI) of INR 519 billion in Q2FY23 (+23%/+24% QoQ YoY), with 67% coming from the domestic market. OB at the end of September 22 was a record INR 3.7tn, with infrastructure at 72% making up a large chunk of it, followed by energy at 19% (high-tech manufacturing at 5% and other at 4%). Geographically, domestic orders contribute 72% to OB.
Robust balance sheet: Net D/E increased to 0.89x from 0.82x at the end of June 22. NWC to sales was stable at 20.9%. LT has guided FY23 NWC for sales in the range of 20-22%. Capex in traditional business is expected to be INR 25-30 billion every year, while the total capex for new businesses for data centers, electrolysers and storage batteries is expected to be around INR 70-75 billion.
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