Results Review for Larsen & Toubro, Tata Motors, Petronet LNG, RBL Bank

By Parikshit D Kandpal

Larsen & Toubro Ltd (NS:): Larsen & Toubro’s (LT) Q4FY22 revenue/EBITDA/PAT missed our estimates by 3/12/13%. Execution normalised during the quarter. However, domestic tendering activity was brisk with the order-to-tender ratio at 51% for FY22 (vs 70% in FY21). EBITDA margin, at 12.3%, was down 95bps YoY, affected by cost inflation and delay in claim certification in project and manufacturing business. LT secured a soft loan of INR 30bn from the Telangana government and is in talks to bring an equity partner to hold a 51% stake in Hyderabad metro project. Along with this de-risking, it expects to offload IDPL and Nabha Power project from its balance sheet. LT unveiled its Lakshay 2026 strategic plan, wherein it is targeting INR 3.4tn of order inflow (OI) in FY26 with a revenue of INR 2.7tn and RoE of more than 18%. Given (1) its record high order book (OB) of INR 3.6tn; (2) improving health of Hyderabad metro project; and (3) revival in private Capex, we maintain BUY on LT. However, we decrease the SOTP-based target price to INR 2,296/sh (22x core Mar-24 EPS), given the strong headwind of cost inflation and its subsequent impact on the margin.

Tata Motors (NS:): TTMT’s Q4 performance was a mixed bag with India PV business posting impressive performance while the same for JLR and India CV remained lacklustre. Despite management’s efforts, net consolidated auto debt has actually increased YoY to INR487bn in FY22 from INR 409bn in FY21. JLR’s target to achieve (1) >7% EBIT margin by FY24 and >10% by FY27; (2) market share gain in key geographies; and (3) becoming net debt-free by FY25 appear highly ambitious, given: (1) market share gains are difficult to achieve as JLR lags global peers in EV transition; (2) EV transition for all global peers is expected to be margin dilutive; and (3) all global luxury peers are pushing harder for investments in evolving technologies (ACES). We see near-term incremental margin pressures for JLR, given the China slowdown and unabated supply constraints. As a result, we have lowered our estimates by 9% each for FY23/24E. Maintain REDUCE with a revised TP of INR398/sh (from INR 441/sh).

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Petronet LNG Ltd (NS:): Our REDUCE recommendation on Petronet LNG (PLNG) with a TP of INR 215 is based on: (1) the adverse impact of high spot LNG price and (2) rising domestic gas production on spot LNG demand in the medium term. Q4 reported revenue/EBITDA/PAT was 15/29/31% below our estimate due to lower-than-expected volumes.

Gujarat State Petronet (NS:): Our ADD rating on Gujarat State Petronet with a TP of INR 285 is premised on (1) transmission volume growing at only +2% CAGR over FY22-24E to 35mmscmd due to high spot LNG price environment driven by geopolitical issues, low global inventories, and pick-up in demand post reopening of economies and (2) limited upside triggers in the near term. Hence, we believe that the stock is currently fairly valued with an RoE of 16% in FY24E and a combined FCF of INR 37bn over FY22-24E.

RBL Bank (NS:): Despite a healthy NIM (~5%) and positive loan growth (+2.4% YoY), RBL Bank (RBK) missed our estimates, with PAT at INR1.9bn, due to higher credit cost (2.7%). Slippages remained elevated at 4.8% (annualised), predominantly from the MFI and cards businesses. Deposit growth (in line with guidance) was reassuring – the management has guided for a pick-up in loan growth, led by retail. Given its single-engine concentration risk on the credit card portfolio (22% of loans and 56% of fee income), we believe that retail diversification is a necessary strategy. However, we argue that the expected scale and time-to-maturity are likely to take longer and call for elevated investments that back-end the 1% RoA narrative further into FY24. We also flag uncertainty around management succession and transition as a major overhang, with implications for these portfolio strategy decisions. We hack our FY23E and FY24E earnings forecasts by 9%/11% respectively and maintain REDUCE with a revised TP of INR113, implying 0.5x Mar-24 ABVPS (earlier TP at INR160).

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Orient Cement Ltd (NS:): In Q4, Orient’s consolidated volume/revenue/EBITDA/APAT fell 12/3/24/27% YoY, dragged by weak demand and rising energy costs. The high share of AFR and domestic coal usage cushioned margin contraction to a healthy level of INR 946/MT (-14/-2% YoY/QoQ). Healthy cash flow has cooled off its net debt/EBITDA to 0.4x, boosting its capability to take up the next round of expansions. The recent fall in the stock price also makes the valuation attractive. Thus, we upgrade our rating on Orient to BUY from ADD earlier, with an unchanged TP of INR 160/share (8x Mar-24E consolidated EBITDA).

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