Our economist has highlighted that investment spending in the corporate sector could be the most-serious casualty in the current slowdown. We analyse the effect on L&T of slowing investment growth.
Our GDP forecast for FY10 is 6%, and we expect a recovery in 2H FY10. Despite a perceptible slowdown in growth, India is still expected to deliver growth well above 3–5% GDP growth between FY02–04.
Corporate spending accounts for around 45% of L&T’s current order book, and order inflow growth is likely to slow to 18% in FY3/09 compared with 32% in FY3/08.
That growth could be dependent on public spending and could come under threat if the government scales back its spending program.
The company is better placed in all key parameters compared to the previous downturn. Current order backlog coverage is close to an all-time high 2.1x compared with 1.4x during FY3/01.
L&T is currently trading at about 11x FY3/10E, and traded in the band of 10–15x for most of the FY3/00–02 period, when growth was significantly slower than is forecast for the next three years.
Based on analysis, 12-month price target is Rs1,385 based on a Sum of Parts methodology. The catalyst could be 3Q results, which could reaffirm company’s ability to meet guidance on order inflows and margins, would be key for stock-price performance.
L&T remains one of our favoured picks in the Indian engineering and construction space given its strong balance sheet, capabilities across spectrum and valuation comfort as it trades close to its past cyclical lows.