L&T sees upgrades as stock price down 12.5% in 3 months

Company expected to end FY13 with 15% growth in order inflows

Slowing economic growth and weak investments have taken a toll on India's largest infrastructure company, Larsen & Toubro (L&T). The company's shares have fallen 12.5 per cent over the last three months, while the Nifty has lost 0.75 per cent in the same period. The lack of sufficient triggers in the FY14 Budget that would revive the investment cycle has put further pressure on the sector. While there is little clarity on when the capital expenditure cycle will revive, the stock's valuations have gone down to pre-2005 levels, analysts say.

Most brokerages have upgraded the stock, thanks to its recent underperformance. According to Nomura, which has upgraded the stock to 'neutral' from 'reduce', "Post the recent correction, L&T is trading at 14.7x adjusted FY14 earnings per share, which is close to its pre-FY05 one-year forward P/E multiple levels." Goldman Sachs, which again has upgraded the stock to 'buy', says the current price implies 6.4 per cent growth in the engineering and construction revenues over the next 15 years, which appears unjustified for one of the largest infrastructure companies in India.

However, attractive valuation is not the only reason for the spate of upgrades the stock has seen lately. Analysts are expecting L&T to end the financial year with 15 per cent growth in order inflows. Historically, the fourth quarter (January to March 2013) is considered to be a strong one in terms of order inflows. Though the macro-economic conditions remain weak, analysts believe the government's focus on the Delhi-Mumbai Industrial Corridor, Dedicated Freight Corridor coupled with transportation projects would see L&T's order inflows pick up sharply in March.

Between January and February, the company reported order wins of Rs 3,900 crore, spread across segments like buildings and factories, hydrocarbons, defence and power. Rupa Shah of Prabhudas Lilladher says: "We are assuming a 10 per cent year-on-year order inflow growth for FY14-15, which has least chances of a negative delta. We are expecting a 10 per cent CAGR in standalone earnings for the period of FY12-15E which is again not an out-of-reach assumption." The brokerage is expecting margins to stay at 11 per cent levels.

Despite the attractive valuations, the company faces the usual risks. A lot of the optimism would be misplaced if order inflow growth languishes between zero and five per cent in FY14 or if margins trend lower than 11 per cent. Goldman Sachs expects order inflows to be subdued in FY14 at seven per cent, as overall macro recovery would take time. It says: "We expect it to pick up in FY15 to 13 per cent driven by higher infrastructure/hydrocarbons ordering and broadbased capex recovery."