With infrastructure development as its key focus, the government launched the National Infrastructure Pipeline in 2019 envisaging a capital expenditure of ₹111 lakh crore over the course of FY2020-25. The outbreak of the pandemic in 2020, however, slowed down progress in FY21, especially in H1.

The easing of lockdown restrictions and the recovery in economic activity reflected in improving financials from December 2020 quarter and a strong show in the latest June 2021 quarter for infrastructure companies. Today, infrastructure players supported by large order books and lower leverage are well set to benefit from the expected cyclical recovery. The recently announced National Monetisation Plan that aims to monetise existing infrastructure assets to fund new investments, too is a step in the right direction.

Engineering and construction major Larsen & Toubro (L&T) has a large and diversified order book, an established execution track record and a strong balance sheet. The L&T stock is reasonably valued too, in an otherwise expensive equity market.

The stock has gained 131 per cent from a low of ₹708 per share in March 2020. At ₹1,638, the stock trades at a one-year forward price-to-earnings multiple of 18.9 times, not significantly above its 3-year average historical forward P/E of 16.3 times (Bloomberg consensus estimates).

This along with the presence of macroeconomic tailwinds for infrastructure, and a gradual recovery in industrial capex make the L&T stock a good buy. .

Also, while rising commodity prices may be a possible risk, there are many mitigating factors. One, 60 per cent of L&T’s current order book is comprised of variable price contracts.

The remaining 40 per cent fixed price contracts have contingency buffers to mitigate the impact.

The likelihood of many projects crossing the margin recognition threshold in FY22 too should help.

Robust, diversified order book

L&T has a well-diversified business spanning multiple segments and geographies. In FY21, 63 per cent of the consolidated revenue came from India, 17 per cent from the US and Europe, 12 per cent from the Middle East and the remaining from the rest of the world.

Infrastructure, Hydrocarbons, Power and Engineering (EPC projects and manufacturing) constitute L&T’s core ex-services business. The services business comprises IT & Technology Services (L&T Infotech, L&T Technology Services and Mindtree), Financial Services (L&T Finance Holdings) and Development Projects.

Infrastructure, which includes buildings and factories, transportation projects, and heavy civil infrastructure, is L&T’s largest business segment. In FY21, infrastructure accounted for 45 per cent of the company’s consolidated revenue. The next three largest segments, IT & Tech Services, Hydrocarbons and Financial Services contributed another 19 per cent, 12 per cent and 10 per cent respectively to the FY21 revenue.

In terms of profitability (EBITDA), the biggest contributors in FY21 were IT & Tech Services (35 per cent), a segment unaffected by the pandemic, and Infrastructure (30 per cent). As of June-end 2021, L&T had an aggregate order book of ₹3.2 lakh crore with an execution cycle of 27 months. This provides revenue visibility over the next couple of years.

Macroeconomic tailwinds

Infrastructure projects account for three-fourths of the company’s consolidated order book. With progressing economic recovery and a pick-up in tendering and award activity that slowed down post-covid, the order momentum should gather further pace. Higher capital expenditure by companies from the oil and gas and metals sectors too should aid the company’s order prospects.

A continuation of the better execution of infrastructure projects seen in June 2021 quarter should drive revenue growth and keep costs under check. A possible third Covid wave could play spoilsport.

Strong financials

Between FY16 and FY20 (covid-impacted FY21 has been excluded), L&T grew its consolidated operational revenue 9.3 per cent to ₹1.45 lakh crore and operating profit 12.4 per cent to ₹13,867 crore (both CAGR). FY20 numbers exclude the impact of the company’s electrical & automation (E&A) business classified as discontinued business.

In the latest June 2021 quarter, L&T reported consolidated revenue of ₹29,335 crore (up 38 per cent y-o-y) and operating profit of ₹2,454 crore (up 159 per cent y-o-y) from continued operations. Thanks to better execution and the low base of last year, revenue from infrastructure projects rose 63 per cent to ₹10,409 crore and EBITDA 84 per cent to ₹736 crore in the June 2021 quarter. IT and Tech Services reported 20 per cent growth in revenue to ₹7,222 crore and 34 per cent in EBITDA to ₹1,671 crore in the June 2021 quarter from year-ago. As of March-end 2021, L&T had a consolidated net debt-to-equity ratio of 1.0 time, down from 1.53 times a year ago. Net working capital to sales ratio improved from 26.8 per cent a year ago to 22.9 per cent in the June 2021 quarter .