Fitch Affirms 'BBB+' Ratings On L&T, CRISIL Assigns 'AAA'

Fitch Ratings, a global credit rating agency, has given a “BBB+” rating to Larsen & Toubro with a stable outlook.

What Happened: “L&T’s robust record of steady margins, backed by adequate risk management and diversification into stable and high-margin IT and technical services businesses, buffers its ratings against the inherent risks in the E&C (Engineering and Construction) sector,” the rating agency stated.

The stable outlook is based on Fitch’s expectation that L&T will maintain comfortable leverage, despite higher growth investments, supported by sustained growth in EBITDA generation and prudent financial management.

The ratings also consider L&T’s strong market position, high revenue visibility, robust diversification, and solid and stable E&C margin. The company’s IT business, which is expected to account for around one-third of L&T’s EBITDA over the medium term, reduces volatility and adds a stable earnings stream.

L&T’s large order backlog provides a high degree of revenue growth visibility, the analysts said. The company is expected to continue its flexible approach to shareholder returns, balancing distributions with business investment needs while limiting the rise in financial leverage.

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CRISIL Ratings also reaffirmed its “CRISIL AAA (stable)/ Crisil A1+” ratings for the bank loan facilities, existing debt instruments and commercial papers of L&T.

The rating agency said that the ratings continue to reflect Larsen & Toubro’s dominant position in India’s engineering, procurement, and construction (EPC) market, its diversified presence, strong financial risk profile, and robust financial flexibility. These strengths are partially offset by the large working capital requirements in the EPC (Engineering, Procurement and Construction) segment.

The analysts added that consolidated revenue, excluding financial services, rose 22% year-on-year to around ₹2.08 lakh crore in FY24, driven by strong execution of a large order book in the EPC business. However, the EBITDA margin, excluding financial services, moderated from 11.7% in fiscal 2023 to 11.2% in fiscal 2024, mainly due to cost pressures in the EPC projects, while margins for the IT & Technology Services segment remained steady at 20.4%.

As of March 31, 2024, the unexecuted order book stood at ₹4.8 lakh crore, which, combined with a healthy sector outlook, provides strong prospects for the company’s revenue growth while maintaining profitability, the agency added in its report.

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