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Last Updated : Dec 10, 2019 12:40 PM IST | Source:

Motilal Oswal cuts L&T target price on lower growth expectation

Motilal Oswal revisited its order inflow assumption to factor in risks of capex cuts and the likely delay in order awarding from the Maharashtra government post the change of government in the state.

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Shares of Larsen and Toubro fell nearly a percent intraday on December 10 after Motilal Oswal reduced its target price by 8 percent as it expects lower order inflow and revenue growth.

In fact, the stock lost more than 10 percent in last one month after brokerages started cutting target price of the stock, though they remained bullish on the same. It was quoting at Rs 1,274.50, down Rs 2.40, or 0.19 percent on the BSE at 1142 hours IST.

"We cut our core E&C EPS estimate by 1.5 percent/3.4 percent for FY20/FY21, incorporating lower order inflow/revenue growth assumption. Consolidated EPS has been cut by 1.3 percent/2.6 percent for FY20/FY21. We have also lowered our target P/E multiple on core business to 20x from 22x on account of macro uncertainties. Accounting for the current market price of listed subsidiaries, target price stands at Rs 1,680 (prior: Rs 1,830)," the brokerage said while maintaining buy call.


Adjusted for the valuation of subsidiaries, the stock trades at FY20/FY21E P/E multiple of 19x/15.6x versus its long-term trading average P/E multiple of 23x, it added.

Motilal Oswal revisited its order inflow assumption to factor in risks of capex cuts and the likely delay in order awarding from the Maharashtra government post the change of government in the state.

"L&T's sensitivity to the cut in Central government capex is quite limited as it forms just around 20 percent of the order book, with limited contribution from roads, railways and defense. Our overall order inflow assumption stands at 9.6 percent/10.8 percent for FY20/FY21 with core E&C order inflow growth estimated at 5.2 percent/8.8 percent. Second half of FY20 ask rate for core E&C is at 2.2 percent," it said.

But, L&T is better off navigating concerns compared to peers.

"Thanks to L&T's well-diversified business across verticals as well as geographies, it is in a better position to overcome macro challenges compared to mid-cap EPC companies dependent on any single segment or geography," Motilal Oswal said.

For instance, post the formation of a new government in Andhra Pradesh, uncertainty around the choice of the capital city had a negative impact on NCC, while the impact on L&T was quite limited.

According to the brokerage, conclusion of electrical and automation (E&A) sale deal and return of cash to shareholders can re-rate the stock.

It expects the conclusion of the E&A sale to happen in Q4FY20.

"This would result in gross proceeds of Rs 14,000 crore to the company. With no major capex and aversion to capital allocation in the asset business, there is a high likelihood that L&T may announce special dividend to return excess cash to shareholders, especially as the new tax rules for buyback has made it redundant for the company to choose between the two options," the brokerage said.

Additionally, any improvement in the macro environment would be beneficial for the stock, it added.

Last month, due to slowing order inflow, global brokerage house Credit Suisse downgraded the stock to neutral from outperform earlier and also slashed price target to Rs 1,460 (from Rs 1,750 earlier).


Disclaimer: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.

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First Published on Dec 10, 2019 12:40 pm
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