Analyst Corner: Maintain ‘buy’ on L&T with TP of Rs 2,405

Key takeaway: We hosted management to discuss L&T’s ESG initiatives. Investor questions were mainly on the defence business, and mgt maintained the co is not involved in cluster munition or nuclear weapons. Discussions are on with ESG rating agencies on the defence exposure. We believe L&T is on a re-rating path as it continues to walk the talk on prudent capital allocation, & with capex showing recovery trends. Any ESG rating upgrade would be an added sweetener. Buy.,Defence – 2.5% of FY21 revenues: L&T’s published FY21 integrated sustainability report states it does not manufacture any explosives or ammunition of any kind, including cluster munitions or anti-personnel landmines or nuclear weapons. It also mentions the business does not customise any delivery systems for such munitions.,ESG rating agencies have raised concerns as L&T is associated with work on India’s nuclear submarine Arihant and Pinaka missiles.,Green portfolio is 29.6% of FY21 revenues and on an uptrend: Management surpassed the 25% FY21 target for green portfolio revenues that it set in FY15-16. Solar and hydropower projects, power T&D, green buildings, water and resource conservation, solid waste management and emission reduction through building mass rapid transport systems are a part of L&T’s green portfolio.,Renewable energy doubles from 5% of consumption in FY16 to 10% in FY21: L&T has committed to be water neutral by 2035 and carbon neutral by 2040. Recycled materials used in FY21 is higher by 42% vs FY16, which is significantly higher than the 5% target that was set. Gender diversity is an area it is working on with its recent ‘Renew: Career Re-entry for Women’ program focused on encouraging female professionals to re-enter the corporate world after a career break.,Capital allocation – remains a priority: L&T’s IT subsidiaries are a key part of the consolidated offering and is a focus area for the company. Reassessing businesses like L&T Finance, which require periodic capital infusion, was mentioned as a part of the strategy in the FY21 annual report. Management reiterated that the subsidiaries are independent and cash support from the parent will remain at minimal levels.,We maintain our Buy rating, with a SOTP-based PT of Rs 2,405, valuing core E&C at 10x Sept 23E EV/EBITDA (consol PB of 3.5x and 17.5x EV/EBITDA Sept 23E).,Risks: 1) Management not following prudent capital allocation; and 2) Government infra spend not growing from pre-COVID levels.,