The Union budget presented by Finance Minister Nirmala Sitharaman last fortnight was a unique fiscal exercise. Instead of the run-of-the-mill style of tinkering with tax rates, providing some relief here and imposing some tax there, she focused this time on only one segment – infrastructure development — and has earmarked a huge capital expenditure outlay which is unprecedented in the fiscal history of the country. Interestingly, Larsen & Toubro will be one of the biggest beneficiaries of this budget. Keeping this fact in mind as well as the robust outlook for the company, we have selected this engineering colossus as the Fortune Scrip for this fortnight.

Set up by two far-sighted techno-savvy Danish engineers —Henning Holek Larsen and Soren Toubro – way back in 1938, it has grown into a huge banyan tree with its branches spread all over the world. L&T is today an Indian multinational conglomerate with business interests in engineering, construction, procurement, manufacturing technology and financial services. This Mumbai-headquartered company is counted among the world’s top five construction companies with 118 subsidiaries, 6 associates, 25 joint ventures and 35 joint operations companies. Today, it has 71 Fortune 500 clients with a marked presence in North America and Europe.

BUMPER DIVIDENDS

Needless to say, the company has gone from strength to strength on the financial performance front. During the last 12 years, its consolidated sales turnover has expanded from Rs 43,776 crore in fiscal 2009-10 to Rs 145,452 crore in fiscal 2019-20, before declining modestly to Rs 135,979 crore in fiscal 2020-21 in view of the Covid-19 pandemic.

The consolidated profit at the net level has more than doubled from Rs. 5452 crore to Rs. 11,583 crore during this period. The company is financially sound, with reserves as on March 31, 2021 standing at Rs 60,045 crore – over 138 times its equity capital of Rs 280.91 crore, that too after as many as 10 bonus issues, the last four ones being in the ratio of 1:1, 1:1, 1:2 and 1:2. The company has been regularly paying dividends, the rate for the last two years being 900 per cent. However, we have not selected this company as the Fortune Scrip only because it is a blue chip, multi-bagger company. We strongly feel that prospects for the company going ahead are all the more promising and it will be in a position to shower a lot of benefits of compounding to investors.

• After the breakout of the pandemic, business activity in the EPC segment came down during the last quarter of 2019 and the first quarter of 2020. But thereafter, activity started picking up. During fiscal 2021, L&T was flooded with construction orders and the order backlog shot up by 11 per cent to Rs 3.3 lakh crore by September 2021. This ensures the revenue visibility of the company for the next 3 years or so.
• L&T has emerged as one of the most preferred infrastructure building companies not only in the domestic market but also at the global level. Little surprise then that orders are pouring in for the company. With the declining impact of the pandemic, the company’s order book has increased by 11 per cent yoy to Rs 3.3 lakh crore at the end of September 2021. By the end of the current fiscal year, the order book is expected to reach near the Rs. 5 lakh crore mark. The backlog of Rs. 3.3 lakh crore is equivalent to 3.2 times the fiscal 2021 revenues. The number of workers rose to 2,51,000 in October 2021 as compared to 1,70,000 in May 2021.

BUMPER ORDER BOOK

• The order book as on December 31 stood at Rs 3,404 billion, with infrastructure accounting for 73 per cent, hydrocarbon 16 per cent, power 3 per cent, HE and defence 2 per cent each, and others 4 per cent. Areawise, domestic orders accounted for 76 per cent, Middle East 17 per cent, the US and Europe 0.4 per cent and the rest of the world 7 per cent.
• As the current order book suggests revenue visibility for the next three and a half years, the longterm outlook for the company is highly encouraging. Says Motilal Oswal, “L&T remains the best play on India’s capex story, the pandemic impact notwithstanding. We note that without the capex cycle, it may be difficult for economic growth to achieve/sustain higher levels. However, once the situation improves, we believe L&T will be able to improve its working cycle as it has done in the past. We do expect a bounce-back in fiscal 2022, helped by stabilization of working capital.

GOING GREEN

With a view to improving its ESG (environment, social and corporate governance) score, the company has focused on its green portfolio. At present, green energy consumption is at 8.5 per cent of the total energy consumed and the target is to increase it to 15 per cent in the next 2 years. It has already achieved a 60 per cent target for water recycling and is working to increase that metric. The major steps being taken on water conservation include the use of waterless urinals and plant operations improvement to stop leakages in old pipelines.

Above all, the latest budget presented on February 1, 2022 will give a big boost to L&T. The budget has provided an unprecedentedly high amount for infrastructure development. Out of the total expenditure of over Rs 39 lakh crore, the highest percentage increase in allocation is in the Ministry of Communications (93 per cent), followed by the Ministry of Road Transport and Highways (62 per cent) and the Ministry of Jal Shakti (25 per cent). Undoubtedly, L&T will emerge among the top beneficiaries of this budget. Its ability to deliver end-to-end solutions help in registering industryleading growth. Its ability to win large deals, it presence in niche verticals, adding Fortune 500 clients and digital prowess are other key drivers. Needless to say, the company will grab sizeable infra orders particularly in the field of bridges, highways, ports, etc.

EYE ON DEFENCE

Again, the budget has also given a thrust to defence by insisting that a sizeable 68 per cent of defence expenditure orders should go to domestic companies. Here also, L&T, being a leading player in the field of defence, is bound to corner a number of orders.

Viewed from all angles, L&T will emerge as a ‘must include’ stock in the portfolio of every discerning investor.