Foreign brokers project this mighty contractor to turn into a mammoth

Foreign brokers project this mighty contractor to turn into a mammoth

NEW DELHI: Larsen & Toubro, the name synonymous with mega engineering and construction projects in India, also the most valued contractor in the country, is bound to become even bigger, say global brokerages.

Some analysts are seeing as much as 25 per cent potential upside in the next 12 months following its quarterly earnings. The company reported its best ever quarter in terms of order inflows thanks mainly to two orders to construct high-speed rails.

In its post-earnings note, UBS said L&T’s book-to-bill ratio is at a 20-quarter high, which provides significant revenue visibility. However, the valuations remain undemanding as the market is not pricing its market share gains at the expense of its peers, it said, making a case for buying the stock. It has a target of Rs 1,575.

L&T on Monday said its net profit rose 5 per cent to Rs 2,466.71 crore. Revenue from operations, however, decreased 1.78 per cent on a year-on-year basis to Rs 35,596.42 crore. The orders for the quarter soared 76 per cent over the corresponding quarter of the previous year, and stood at Rs 73,233 crore.

Credit Suisse maintained an ‘outperform’ rating on the stock with a target of Rs 1,700, and said the results were in line with estimates. “Outlook is positive with attractive valuations. Pro-cyclicality can boost upside. Valuations continue to remain attractive despite run-up. Record order booking, aided by large orders, and momentum remain strong,” it said.

The company is also hopeful of the future now, as its chief SN Subrahmanyan confessed: “It is a problem of plenty at the moment.” L&T said that it was looking at Q3 as the “quarter of turnaround”.

The stock was trading down 1.3 per cent at Rs 1,343 on Wednesday amid a market-wide selloff. The stock has surged 27 per cent in the last three months on improving prospects for the infrastructure sector.

“Improving share of low-payment risk orders and with potential deleveraging ahead, L&T is favourably placed in spite of near-term commodity headwinds,” said Priyankar Biswas and Neelotpal Sahu, analysts at Nomura.

They retained EPS estimates for FY21-23 with minor changes valuing L&T on an SOTP basis to arrive at a target of Rs 1,616, implying 19 per cent upside. According to them, key risks are a delay in economic recovery, a sharp increase in commodity costs like steel and cement, and a rise in working capital.

Brokers also see the company deleveraging, as the collection from public sector orders remains robust. L&T has already reduced its net debt level by Rs 13,100 crore in the third quarter of the ongoing financial year compared with FY20 levels.

The company is already the biggest contractor in India but stands nowhere in comparison to its Chinese counterparts, which are some of the biggest construction companies in the world. However, continued market share gains in domestic and foreign markets may push it close to those levels.

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