Broker’s Call: L&T (Outperform)

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Target: ₹4,020

CMP: ₹3,573.80

Our interactions suggest that investors are concerned about the security situation in the Middle East, following attacks on ships in the Red Sea by Houthi rebels in Yemen. In our view, a key material negative development is the rise in ocean freight costs, which can have some impact on near-term EBITDA margins.

However, this rise is significantly lower than that in FY22 and can moderate due to shipping overcapacity.

L&T delivered a sharp rise in order wins from Saudi Arabia after its improved focus on compliance with IKV (in-kingdom value) guidelines. We expect similar gains in the UAE and Qatar as compliance with ICV (in-country value added) rises with more localisation.

So far, Middle East tendering has been strong (post the Israel-Hamas conflict) and there has been no negative news flow on any disruption in execution in these regions. In fact, Oilprice.com reported that L&T could be awarded the Safaniya contract to construct a gas oil separation plant in Saudi Arabia in Q4-FY24.

We modestly raise our FY25E EPS by 2 per cent and raise our target EV/EBITDA multiples for Energy and Hi-tech manufacturing to align with listed peers in our SOTP valuation. We value the listed subsidiaries at market cap with a 25.2 per cent holdco discount. Weak ordering momentum is the key risk.