Union Budget 2015: L&T shares hit record high; Macquarie retains outperform

Moneycontrol Bureau

Shares of Larsen and Toubro (L&T) rallied more than 2 percent intraday to hit an all-time high of Rs 1,795.50 on Saturday. Brokerage Macquarie has retained its outperform rating on the stock with a target price of Rs 1,777 apiece.

In the last 24 hours, two key sectors—Railways and Defence—have shown clear signs of uptick in capex. L&T’s consortium has been selected for USD 8 billion worth of projects, which the brokerage estimates should translate into orders worth at least USD 1.25 billion for L&T.

The Railways Budget includes a capex target 50 percent higher than that for FY15. L&T’s diversity of businesses makes it the most leveraged to an uptick in India’s capex cycle, says the brokerage in its note to clients.

The government on Thursday has selected two consortia—L&T-Tata Power and BEL-Rolta—for the USD 8 billion battlefield management system (BMS) project. The government will compensate the consortia for prototype development and both the consortia would get orders at bid-based prices.

As per Rolta’s management, it would take 2 years for the prototype to be developed and tested. The company has indicated that the winning consortium would get 70 percent of the contract value and the rest would go to other consortium if they match the price.

Macquarie feels there are more defence orders in pipeline. "L&T is also participating in the landing platform dock (LPD) order, which is worth USD 1.5 billion. L&T is one of the two companies shortlisted, along with Pipavav Shipyard. This order was exclusively reserved for the domestic private sector," it explained.

The brokerage believes defence could be a game-changing sector, given the pipeline of more than USD 50 billion to be spent over the next 5-8 years.

The Railway Budget is a pragmatic budget, with a focus on capex, says the brokerage, adding capex is envisaged to increase 50 percent, from USD 11 billion in FY15 to USD 16 billion in FY16.

Most of the remaining DFCC (dedicated freight corridor) orders (around USD 7 billion) are likely to be placed in FY16, and L&T is a key player on the western leg of DFCC, feels the brokerage.

The government has presented a 5-year capex target of USD 140 billion (FY16-20), which is a 3.5 fold increase over USD 40 billion spent in the 11th 5-Year Plan (2007-2012). States too would accelerate spending on urban metro projects, in which again L&T is a key participant, according to the report.

In FY15, India accounted for 78 percent of L&T’s order inflow, compared to 67 percent in FY14. As investors’ conviction on India’s share increases, Macquarie believes the stock would get re-rated.

At 09:34 hours IST, the scrip of Larsen and Toubro was quoting at Rs 1,791.25, up Rs 32.70, or 1.86 percent.

Posted by Sunil Shankar Matkar