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Larsen & Toubro Ltd
Reuters: LART.BO Bloomberg: LT IN Exchange: BSE
Ticker: LART
One of the best positioned for cyclical revival; u/g to Buy
Pessimism overdone, valuations attractive; upgrading L&T to Buy
Following a 20% stock correction on rising global risk perception, the core E&C
business is trading at 15x FY13 P/E (below Lehman crisis levels) on our estimates,
which are 12% below consensus. Industry utilisation rising closer to peaks, even
with sluggish near-term demand, could drive up corporate capex. We see a sharp
pick-up in road-rail capex growth, a strong uptick in power demand and fewer
companies with the b/s to take advantage of the capex revival; we find L&T’s
valuation attractive vis-รก-vis the position in the cycle. Buy, target price INR1,850.
Well positioned to benefit from capex recovery as competitors struggle
As per our sectoral hypothesis, India should see a gradual recovery in capex cycle
and big-ticket order placement in 12-18 months. L&T’s diverse exposure to sectors
that are likely to lead the recovery such as roads, metro-rails and fertilisers could
make it one of the biggest beneficiaries. Also, L&T’s strong balance sheet and
cash flow generation could help it win big-ticket orders at a time when smaller
competitors grapple with issues such as stressed cash flow, high leverage and
limited net worth/ technological capabilities.
Estimates factor in pains of past downcycle and benefits of current upcycle
Our estimates factor in E&C margin compression of ~120bps vs. the management
guidance of flat margins and we also assume a pick-up in sales from new orders
wins hereon. Our consolidated earnings estimates for FY12, FY13 and FY14 are
5%, 12% and 13% below consensus, respectively.
Valuations near Lehman-crisis level; Buy
With our estimates being 12 % below consensus and lower risk of our earnings
being peak-cycle earnings, current valuations at P/Es of 16x FY12E and 15x FY13E
for the E&C business appear attractive. Our SOTP-based target price of INR 1,850
is based on P/E of 16x FY13E for E&C business (vs. 20x FY12E earlier) and P/B of
2.5x FY13E for finance business (vs. 3x FY12E earlier). Execution delays and
commodity prices are key risks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro Ltd
Reuters: LART.BO Bloomberg: LT IN Exchange: BSE
Ticker: LART
One of the best positioned for cyclical revival; u/g to Buy
Pessimism overdone, valuations attractive; upgrading L&T to Buy
Following a 20% stock correction on rising global risk perception, the core E&C
business is trading at 15x FY13 P/E (below Lehman crisis levels) on our estimates,
which are 12% below consensus. Industry utilisation rising closer to peaks, even
with sluggish near-term demand, could drive up corporate capex. We see a sharp
pick-up in road-rail capex growth, a strong uptick in power demand and fewer
companies with the b/s to take advantage of the capex revival; we find L&T’s
valuation attractive vis-รก-vis the position in the cycle. Buy, target price INR1,850.
Well positioned to benefit from capex recovery as competitors struggle
As per our sectoral hypothesis, India should see a gradual recovery in capex cycle
and big-ticket order placement in 12-18 months. L&T’s diverse exposure to sectors
that are likely to lead the recovery such as roads, metro-rails and fertilisers could
make it one of the biggest beneficiaries. Also, L&T’s strong balance sheet and
cash flow generation could help it win big-ticket orders at a time when smaller
competitors grapple with issues such as stressed cash flow, high leverage and
limited net worth/ technological capabilities.
Estimates factor in pains of past downcycle and benefits of current upcycle
Our estimates factor in E&C margin compression of ~120bps vs. the management
guidance of flat margins and we also assume a pick-up in sales from new orders
wins hereon. Our consolidated earnings estimates for FY12, FY13 and FY14 are
5%, 12% and 13% below consensus, respectively.
Valuations near Lehman-crisis level; Buy
With our estimates being 12 % below consensus and lower risk of our earnings
being peak-cycle earnings, current valuations at P/Es of 16x FY12E and 15x FY13E
for the E&C business appear attractive. Our SOTP-based target price of INR 1,850
is based on P/E of 16x FY13E for E&C business (vs. 20x FY12E earlier) and P/B of
2.5x FY13E for finance business (vs. 3x FY12E earlier). Execution delays and
commodity prices are key risks
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