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L&T’s financial bid is considerably lower than others, and above the minimum bid price.
L&T’s financial bid is considerably lower than others, and above the minimum bid price.

Even a likely bullet train order struggles to move the L&T stock

  • The L&T stock has been underperforming considerably and is down about 30% year-till-date, compared to a 2.2% decline in the Nifty 50 index

The Larsen and Toubro Ltd stock showed some signs of life on Tuesday after it emerged as the lowest cost bidder for the construction of a 237-km long viaduct of the Mumbai-Ahmedabad high-speed rail project.

The company’s shares rose about 3% intra-day and was the fifth largest traded stock by value on the NSE. But by the end of the day, the stock’s gains stood at just 1.7%, suggesting some investors used the opportunity to exit the stock.

Source: HDFC Securities Ltd
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Source: HDFC Securities Ltd (Sarvesh Kumar Sharma/Mint)

The L&T stock has been underperforming considerably and is down about 30% year-till-date, compared to the 2.2% decline in the Nifty 50 index.

One of the main quibbles from investors has been the company’s large investments in non-core businesses. Analysts at Jefferies said that since FY05, L&T has invested 30% of its cash flows in businesses outside the core engineering and construction verticals. With the sale of the switchgear business to Schneider and considering the talks of selling its asset management business, hopes are rising of an improvement in return ratios.

But the fact that the stock is refusing to budge suggests that investors would rather play it safe than be sorry. In other words, L&T has a lot to do to regain investor confidence.

Coming back to the bullet train project: this can alleviate some concerns on L&T’s dwindling order inflows.

Lately, the Street has been pencilling in a sizeable drop in order book for L&T, as private and public sector capital expenditures have been slowing.

“(The) high-speed rail order finalization in favour of L&T will be significant as this will catapult the order inflow for the first half of FY21 to 80,000 crore (8% lower year-on-year) and help L&T to restrict the order inflow decline in FY21 to mid-single digit with flattish order inflow in the second half," said Antique Stock Broking analysts in a client note.

Meanwhile, L&T’s target to boost return on equity (RoE) to 18% by FY21 will be pushed further down the road.

“In two years’ time, L&T should have surplus cash flows to reward shareholders as its non-core investments decline and working capital and execution normalize post a difficult FY21E. Management has not met its five-year target of 18% RoE by FY21E, but is hopeful of eventually getting there," noted Jefferies in a report.

While things may be improving gradually, L&T still has a long way to go, and investors seemed to be tired by the pace of its progress. Nevertheless, analysts maintain that the firm’s financials are at cyclical lows, while the price-to-book value is below the financial crisis.

“L&T is trading at 1.3 times consolidated price to book value for FY23 estimates, giving downside protection, as even in FY21 return on equity will be 10% and should recover to 14% in FY23," added Jefferies India analysts.

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