L&T shares keep scaling wall of downgrades, at 1-yr high

Shares of heavy engineering major Larsen & Toubro hit a fresh one-year high of Rs 1614 Wednesday, even as HSBC became the latest to join the growing bandwagon of brokerages to downgrade the stock citing expensive valuations.

Since the start of this calendar, L&T shares have risen around 60% till date, compared with a 21% rise in the 30-share Sensex.

But most analysts now feel the stock may have got ahead of fundamentals and do not expect big gains from these levels.

"We now think market is becoming exuberant on expectation of reforms measures from the Government. We expect L&T to book 12% growth in new orders during FY13 and 15% during FY14 reflected in our bullish EPS estimates for parent L&T (10% above consensus for FY14 EPS and 3% for FY15 EPS). Hence we do not anticipate a meaningful bump up from new project announcements in the near term," said the HSBC note to clients on Wednesday.

The brokerage has downgraded its rating on the stock to 'neutral' from 'overweight', but raised target price to Rs 1761 from Rs 1651.

The L&T management has forecast a 15-20% rise in order book for the current financial year, which many analysts think is a difficult target because of delayed clearances for large projects. Over the last 10 days, the company's construction division has won over Rs 7500 crore of orders . But analysts have cautioned that these orders may not contribute significantly to the company's overall margins.

Last week, Goldman Sachs had downgraded the stock to 'neutral' from 'buy' saying stock was trading above historical median valuations despite a tough macro economic environment.

Here's what some other brokerages have been saying about the stock of late:

Kotak Securities: L&T stock is quite expensive at 17.5 times FY2014(estimated) EPS. We model a 9% growth in EPS in FY2012-14E, which seems fairly challenging in the context of (1) paucity of large projects in the pipeline  and (2) an extremely weak investment environment.

ICICI Securities: We reiterate our sell recommendation on L&T due to i) continued weakness in the company's key segments such as power and process on account of fuel availability issues and Coalgate, and unlikely benefit from the current policy reforms, ii) increasing share of infrastructure projects (high competition-low margins -higher working capital cycle) in the company's order book (up 47% in Q1FY13 from 39% in FY07) and iii) adjusting for valuation of subsidiaries, the stock is trading at an expensive valuation at 17.3 times stand-alone earnings despite meagre (compounded annual) growth of 8% FY11-14E.

CLSA: We expect L&T's order flow to disappoint for the third year in a row in FY13 amid the grim macro environment, with growth over FY12-14 declining to a subpar 12% compounded annually. The hydrocarbon segment, for which the street forecast a 70-80% YoY increase in orders, will be the key disappointment. Market-share gains in the real-estate sector and rupee depreciation will boost L&T's contracts. However, a declining share of lucrative build-operate-transfer (BOT) projects will hurt its profitability.

JP Morgan: Valuations had bottomed out at 10.7 times 1-year forward P/E around the Lehmann crisis. Currently the stock is trading at 15-plus times 1-year forward earnings. Post 2006 L&T has traded at average P/E of over 20 times. We would be wary of valuing the stock using historical average multiples as growth trajectory and profitability are going to fall sharply over next 3 years, in our view.