Expect 20% upside in L&T over 12 months: Religare

In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Misal Singh, Director - Institutional Research, Religare Capital Markets talks about the rally in capital goods and infrastructure goods on back of macro improvement. Singh anticipates a 20 percent upside in Larsen & Toubro over the next one year, only post elections. Below is the verbatim transcript of the interview:Q: What are you noticing in the infrastructure space itself, is the road premia deferral and the power tariff increases all adding up to making a big difference at all for infrastructure stocks or is it just scratching the surface?A: It is more about what is happening on the macro side which is why you have seen some kind of rally in the capital goods space and to an extent in the infrastructure space. By macro, I mean some development from the political front which is probably perceived as favourable. Secondly, the balance of payment data was quite favourable which also has a bearing on how inflation expectations could pan out which is why you have seen some kind of rally in the capital goods and infrastructure goods. As far as on the ground things are concerned, we are unlikely to see any kind of improvement in the investment intentions in the infrastructure sector at least till the elections and a few quarters ahead of that till there is some clarity on the policy side.Q: So what do you do with a stock like L&T now that has already rallied about 15 percent since the start of the year, would you be cautious at these levels of Rs 1220 or do you think there could be some more upside in the near term?A: In the near term, we do not see upside so by near term I mean at least till the elections. We think the rally is already done. Beyond that, if the election results are perceived to be favourable, you could see some earnings upgrade coming in for 2016 which could be about 10-15 percent kind of earnings upgrade which in turn implies that the stock should at least be up by about 20 percent from a one year perspective. Hence, in the short-term, of course we do not see the stock doing anything much from here but over a one year period, there is a case building up for likely earnings upgrade in 2016 which is contingent on the political outcomes which come through in May. Q: So are you saying that the rally you are seeing in infrastructure stocks, capital goods is more a hope trade, a tactical buy and to convert it into an investment buy you will wait?A: In my view, it was driven more by the macro development over the last week which was the BoP angle to it which basically implies that inflation could be reined in the next six-nine months which then has an impact on the business confidence also. So initially it is a tactical trade and if the positive news sustains that is when the business confidence becomes strong enough for investment intentions to pick-up. Hence, we believe right now it is a tactical trade but if this thing sustains probably three-four months down the line, this becomes more of a fundamental trade.

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