Share price of infrastructure major Larsen and Toubro gained nearly a percent intraday on December 5 after Sharekhan retained its bullish view on the stock.
The stock was quoting at Rs 1,294.35, up Rs 9.15, or 0.71 percent, on the BSE at 1109 hours. The stock has fallen nearly 10 percent in the last two months against 5 percent rally in the Nifty and 7.5 percent upside in the Nifty Midcap 100 index.
The underperformance was led by delay in the revival of project tendering in the infrastructure sector against earlier expectations of revival post-monsoon.
Most brokerages feel L&T is unlikely to meet its full-year order inflow guidance of 10-12 percent as it requires more than Rs 1 lakh crore of inflow in the second half of FY20 to meet the guidance which seems unachievable. But, overall strong execution capabilities of the company are expected to continue in coming years along with government's infrastructure focus that can drive earnings growth.
L&T's order inflows remained weak during Q3FY2020 till date, with three significant orders (Rs 1,000 crore to Rs 2,500 crore) and one mega order (upwards of Rs 7,000 crore) announced till date.
"The weak order intake in Q3FY2020 till date may lead to downward revision in order inflow guidance for FY2020. Further, Maharashtra government putting bullet train project under review and L&T's slow-moving orders have added to near-term uncertainty for L&T," said Sharekhan.
"To achieve the targeted FY2020 order inflow, L&T would require Rs 1 lakh crore–Rs 1.35 lakh crore during second half of FY2020, which seems unachievable, considering weak tendering during Q3FY2020 till date. However, Maharashtra CM's clarification and L&T's strong order backlog excluding stalled projects are expected to lead to healthy execution during FY2020-FY2021," it added.
Sharekhan maintained its earnings estimates for FY2020-FY2021, awaiting clarity on big ticket-size projects and introduced FY2022 earnings in this note.
The brokerage expects the government's thrust on infrastructure investment to remain and expects revival in project tendering as early as Q4FY2020.
However, it reduced its valuation multiple for the standalone business to factor in near-term challenges in the sector and arrive at a revised SOTP-based price target (PT) of Rs 1,700, implying 32 percent potential upside from current levels.
Sharekhan continued to maintain its Buy rating, owing to attractive valuation (P/E of 15x/13x its FY2021E/FY2022E earnings) post the recent correction in the stock.
However, as far as key risk is concerned, it said slowdown in the domestic macro environment or weakness in international capital investment can negatively affect the business outlook and earnings growth.
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