Broker’s call: L&T (Outperform)

Target: ₹3,967

CMP: ₹3,634.50

Larsen & Toubro shares are down 6 per cent m-o-m due to: core Q3 EBITDA margin disappointing and concerns on L&T’s international order prospects after Saudi Aramco decided not to pursue its target of raising oil production capacity to 13 mbpd. This is concerning as Saudi Aramco was the largest contract issuer in CY23.

Saudi Arabia has planned but unawarded contract prospects of $1.53t, according to MEED. This includes Saudi giga projects worth $0.88t as part of Vision 2030. Given that L&T is the largest EPC contractor in Saudi Arabia, it is well placed to benefit from this. Further, while Saudi’s focus maybe shifting away from oil capex, there is a noticeable capex uptick in power, natural gas and chemicals sectors.

Even in the near term, projects worth $195b in the tendering stage, higher than Feb-23 levels. Further, $13b of contracts were awarded YTD-CY24, which suggests that the $209b of contracts awarded in CY23 may be matched in CY24.

Weaker 9MFY24 results drive 8 per cent EPS estimate cuts for FY24. We lower our FY25/26 EPS by about 1 per cent each. Our TP ₹3,697 (earlier: ₹4,020) adjustment is driven by changes in market cap of listed subsidiaries and changes in core (ex-services) EBITDA estimates.