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Larsen & Toubro (LART.BO)
Research Tactical Idea
We believe the share price will fall in absolute terms over the next 60 days.
This is because of lowered forecast/guidance. Our economics team expects Indian interest rates will remain high enough
to stifle growth and that government spending on infrastructure will remain weak. We expect this to cause delay in India’s
corporate capex cycle, which would result in a longer stagnation in L&T’s order flows. With margins at a new peak (12.8%
in F2011) and materials cost pressure coming up (35% fixed price contracts), it seems more likely that L&T’s operating
profit growth will lag its revenue growth over F2011-13e. On valuations, despite the negatives, the stock is trading at a
51% premium to the market on a 12-month forward PE basis (using consolidated EPS) vs. the five-year median premium
of 43%. Please see our accompanying detailed note “L&T – No Longer ‘Waiting for Godot’, Downgrade EW" for more
details.
We estimate that there is about an 80%+ or "highly likely" probability for the scenario.
Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the
scenario.
Stock Rating: Overweight
Industry View: Attractive
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro (LART.BO)
Research Tactical Idea
We believe the share price will fall in absolute terms over the next 60 days.
This is because of lowered forecast/guidance. Our economics team expects Indian interest rates will remain high enough
to stifle growth and that government spending on infrastructure will remain weak. We expect this to cause delay in India’s
corporate capex cycle, which would result in a longer stagnation in L&T’s order flows. With margins at a new peak (12.8%
in F2011) and materials cost pressure coming up (35% fixed price contracts), it seems more likely that L&T’s operating
profit growth will lag its revenue growth over F2011-13e. On valuations, despite the negatives, the stock is trading at a
51% premium to the market on a 12-month forward PE basis (using consolidated EPS) vs. the five-year median premium
of 43%. Please see our accompanying detailed note “L&T – No Longer ‘Waiting for Godot’, Downgrade EW" for more
details.
We estimate that there is about an 80%+ or "highly likely" probability for the scenario.
Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the
scenario.
Stock Rating: Overweight
Industry View: Attractive
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