Buy Larsen & Toubro, target Rs 1,603: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on Larsen & Toubro with a target price of Rs 1,603.

The current market price of Larsen & Toubro is Rs 1,226.20.

Time period given by the brokerage is 'Long Term' when Larsen & Toubro price can reach the defined target.


Investment hypothesis by Edelweiss:
Cumulatively, Central Government is expected to spend Rs 27 lakh crore over the next 5 years on transportation, urban infra and power T&D. L&T, anchored by its diverse capabilities and unique positioning, is expected to grab more than Rs 3.5 Lakh cr orders from these sectors (current order-book Rs 2.5 lakh crore).

Currently, L&T has Rs 2.5 lakh crore of overall order-book and 75 per cent of that are from Infrastructure sector as compared to 45 per cent in FY10.

With the growth in revenue from infrastructure sector (high margin), overall margin of L&T is expected to improve significantly going forward.

With low investment requirement in subsidiaries and self-sustained growth in developmental projects, further investment in subsidiaries will be miniscule and that will improve standalone ROCE by 200 bps over the next two years.

LT’s stock price has always been a leading indicator of the company’s order-inflow trend.

Over the past one year, LT’s stock price has corrected 40 per cent and in FY16 overall order inflow is estimated to decline 10 per cent.

We believe, with anticipated spurt in order inflow in FY17, the stock is poised to give positive returns.

Risk: Delay in pick up in economic cycle may postponement order-inflow and thereby revenue growth. Pressure on margins may get expended due to execution challenges.