BackL&T shares are out of slumber, but further upside relies on execution
The Street is rewarding L&T for addressing concerns such as order inflows, analysts saidL&T sees a pipeline of ₹6 tn across segments, providing visibility for 4QFY21 and FY22 inflows
PremiumAfter a long spell of lacklustre performance, the Larsen and Toubro (L&T) stock is back with a bang. After hovering around ₹930, the shares rose to more than ₹1,100 in November. The Street is rewarding L&T for addressing concerns over multiple fronts, such as order inflows and elevated debt, analysts said.
Of late, the capital goods major has been on an award-winning spree. It recently won the contract to design and construct 47% of the alignment for the Mumbai-Ahmedabad bullet train project. “Order wins are already around 50% of FY20 levels (for core engineering, procurement and construction), while the strong pipeline of infrastructure segment tenders can lead to higher inflows versus FY20," JM Financial Institutional Securities Ltd analysts said in a report on 22 November. L&T envisages a pipeline of ₹6 trillion across segments, providing visibility for 4QFY21 and FY22 inflows, it said.
Investors were also worried about the subdued margins of L&T’s infrastructure arm, which forms more than 70% of its order book. Analysts said the company will address these concerns as it is nearing completion of a few low-margin infra projects. In Q2FY21, operating margins for this segment fell 80 basis points year-on-year to 6.4%. One basis point is one-hundredth of a percentage point.
Also, following the Schneider deal, investors gained confidence that L&T is serious about reducing its exposure to non-core businesses, analysts said. L&T sold its electrical and automation business to Schneider Electric for ₹14,000 crore in an all-cash deal. Further, its decision to use ₹5,000 crore from the deal proceeds to repay debt adds to the comfort, they added. L&T’s consolidated total debt at the end of the September quarter of FY21 stood at ₹1.49 trillion.
Besides, environmental, social and governance (ESG) worries relating to its defence business had emerged. In its recent sustainability report, L&T clarified it doesn’t manufacture explosives. Even though the defence segment contributes only 3% to its order book, globally the focus on ESG practices is increasing, so this statement aids investors’ sentiment towards the company, analysts said.
But some analysts said the positives are largely captured in the stock’s ongoing rally, and it could be in the last leg of this catch-up rally. “Now, execution of recently bagged orders is the key. We expect execution to improve now that labour shortage issues are largely sorted. Investors also want to know the divestment plans for the loss-making Hyderabad Metro project. That is another non-core business, which investors want the company to hive off," said an analyst with a domestic brokerage firm requesting anonymity.
The stock trades at a one-year forward price-to-earnings (PE) multiple of around 16 times. Though valuations have improved, L&T’s PE multiple is still below its long-term average of 21 times, analysts said.
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