L&T attractively priced; see valuation woes ahead: Religare

Religare Capital Markets has marginally downgraded its expectation for L&T's earnings for 2014 and 2015. It was about 5 percent kind of downgrade for 2014 and almost 2 percent downgrade for 2015, says Misal Singh, Director - Institutional Research, Religare Capital Markets. He does not think the downgrade is significant in terms of the pressure on the stock. According to him, the L&T stock is attractively priced at current levels.

Singh told CNBC-TV18, L&T is building in an order inflow of about 14 percent growth in 2014 over 2015 and for the first quarter they have grown at about 28 percent. He is not very aggressive on order inflow growth targets. He believes concern could really come in on the valuation side which is a function of how generally the market and the macro economy evolve from current levels.
Comparing the last six-seven years, margins are close to the bottom level. So the scope for disappointment is minimal from these levels. He says the main threat to the stock comes from how the macro economic environment will evolve considering issues on the currency could feed into inflation which could then feed into various other things, impacting business confidence at the end of the day, which can thereby impact revenue execution. Also Read: L&T Q1 nos dismal: 7 brokerages advice how to trade it now Below is the verbatim transcript of Misal Singh’s interview on CNBC-TV18 Q: Did you downgrade your earnings expectations after yesterday’s numbers and do you expect to see pressure on the Larsen and Toubro (L&T) stock from here?
A: The downgrade was very marginal so it was about 5 percent kind of downgrade for 2014 and almost 2 percent downgrade for 2015. And that is of course because of weak first quarter of 2014. So I think the downgrade is not very significant in terms of pressure on the stock, we think the stock is attractively priced at these levels so we would be buyers at these levels. Q: Most analysts in the market still have a pretty aggressive target in terms of the sales inflows for L&T, what is your own target of what you think they might do for the full year?
A: We are building in an order inflow of about 14 percent growth in 2014 over 2015 and for the first quarter they have grown at about 28 percent in terms of order inflows. So our order inflow growth targets are not very aggressive. Our estimates are fairly conservative keeping in line with the margin profile and revenue execution that is likely to happen in 2014-15. So we are comfortable on the estimates bet. I think the concern that really could come in is on the valuation side which is a function of how generally the market and the macro economy evolve from current levels. Q: What do you think is at primary threat to this stock now, what happens with its margin performance over the next few quarters that orders keep getting delayed and spilt over as has been the case for L&T or there is a big U-turn in terms of this order inflow guidance they are talking about and that begins to sack?
A: If you compare the last six-seven years you will see margins very close to the bottom level. So on the margin front probably the scope for disappointment is minimal from these levels. Also given the fact that international business contribution will decline going ahead, the margin profile should start looking up.
I think the main threat to the stock really comes from how the macro economic environment will evolve from these levels because you do have issues on the currency which could feed into inflation and which could feed into various other things, impacting business confidence at the end of the day, which can in turn impact revenue execution.
So that is where you have the greatest threat. In terms of order inflows probably they will achieve the numbers and hence there would not be a need to downgrade estimates from here. What you should be concerned about is the valuation multiple that you will give to the stock if things deteriorate from these levels. So on earnings estimates we are very close to the bottom, valuations is where you could have a concern. However, given how things are, we have a 15 times one year forward valuation multiple for the standalone business.