Sharekhan has reiterated a BUY call for Larsen & Toubro Limited (L&T), with an upgraded price target of Rs. 4,550. This recommendation is based on robust order inflows, strong revenue growth expectations, and the company's solid positioning in both domestic and international markets. Key drivers include significant projects from the Middle East, an all-time high order book, and continued government investments in infrastructure. Despite some risks from fluctuating oil prices, L&T remains well-positioned to benefit from the AtmaNirbhar Bharat initiative and continued capex spending.

Order Book and Revenue Growth Outlook

Strong order inflows in Q2FY2025:
L&T has reported impressive order inflows between Rs. 28,000 crore and Rs. 47,500 crore in Q2FY2025, with over 60% of these orders coming from the Middle East. These include two mega orders, each valued at Rs. 10,000-15,000 crore, specifically in the Renewables and Power Transmission & Distribution (T&D) segments.

FY2025 targets:
The company is aiming for 15% year-on-year revenue growth and order inflows to rise by 10% YoY. Core businesses are expected to deliver operating profit margins (OPM) between 8-8.25%.

Key Financial Metrics

Revenue Projections:
L&T's consolidated revenue is projected to rise from Rs. 2,21,113 crore in FY2024 to Rs. 3,21,860 crore in FY2027, showing steady year-on-year growth.

Profitability:

Adjusted Profit After Tax (PAT) is expected to grow at a CAGR of 18%, reaching Rs. 20,579 crore by FY2027.
EPS is projected to grow from Rs. 94.3 in FY2024 to Rs. 149.7 in FY2027.
Valuation Ratios:

Price-to-Earnings (P/E) Ratio is expected to drop from 39.3x to 24.8x, reflecting strong earnings growth.
Return on Capital Employed (RoCE) and Return on Net Worth (RoNW) are forecasted to improve to 14.6% and 17.3%, respectively, by FY2027.

Target Price and Investment Rationale

Revised Price Target:
Sharekhan has revised its price target for L&T to Rs. 4,550, rolling forward its valuation to FY2027, driven by the company's robust order book and growth prospects.

SOTP Valuation:
L&T's core business is valued at Rs. 3,323 per share, with additional value coming from its subsidiaries like LTI-Mindtree, L&T Finance Holdings, and L&T Technology Services.

Sector and Market Dynamics

International Opportunities:
A key driver for L&T’s growth is its strong presence in the Middle East, contributing over 60% of its order inflows in Q2FY2025. The company's international order book remains healthy, despite risks posed by crude oil price volatility, especially in Saudi Arabia, which represents a significant portion of the order prospects.

Domestic Capex Opportunities:
The Indian government's focus on infrastructure, particularly in transportation, energy, and defense, continues to provide a significant tailwind for L&T. The company stands to benefit from domestic capex-driven growth, especially with initiatives like AtmaNirbhar Bharat and increasing private-sector investments.

Risks and Concerns

Oil Price Volatility:
Current weakness in crude oil prices, with Brent Oil down 17% since June, could result in a delay or reassessment of capital expenditure from key markets like Saudi Arabia, which represent a substantial portion of L&T's order book.

Macro-Economic Risks:
A slowdown in the domestic macroeconomic environment or geopolitical risks in key markets, including the Middle East, could adversely affect L&T’s order prospects.

In conclusion, L&T remains a robust investment with strong growth drivers, particularly in infrastructure and engineering projects both domestically and internationally. The company's extensive order book, diversified revenue streams, and strategic positioning make it a solid buy for long-term investors.