Here's why JP Morgan has an 'overweight' rating on L&T

JP Morgan is upbeat on Larsen and Toubro, citing a pickup in executions going forward. The research firm has an overweight rating on the stock with a target price of Rs 1,670. It also feels a few other parameters could work in favour of the firm, but the challenge lies in faster execution. “Easing working capital pressures have led to a steep uptick in operating cash flow so far this fiscal, but L&T may have to navigate the trade-off between reigning in working capital and faster execution," the firm said in a report.The research firm has highlighted management’s comments about client-side issues in projects seeing a reduction, but demonetisation weighed on execution. It now expects orders booked in latter half of the fiscal shall be in thick of execution in the last quarter of this financial year. The challenge for L&T lies in navigating the trade-off between reigning in core net working capital/sales and faster execution, JP Morgan said. Additionally, the tendency to go slow on execution of projects where customers are facing liquidity issues could be the biggest risk to L&T achieving its revised revenue growth guidance for FY17. It also observed a likely guidance revision. There is no denying a spillover of big-ticket order prospects to next fiscal, and a miss versus toned down guidance is highly likely. “We’ve entered March now, with just Rs 4,100 crore fresh order disclosures in fourth quarter of the fiscal. Against revised FY17 guidance of 10 percent growth, we estimate 8 percent” the research firm said in a report. The bottom line is, it says, L&T will have to manage an extremely high success factor in converting prospects to orders in March quarter. It will also have to contend with a slowdown in award of residential real estate projects post demonetisation, the report added.