The recent underperformance in the share price of Larsen & Toubro Ltd. should be looked as an opportunity to buy, according to Jefferies India Pvt., which sees multiple upside triggers for the stock as the year progresses.
The stock has fallen over 10% in the last two months. On a year-to-date basis, the stock has underperformed the NSE Nifty 50 and the MSCI India indices by 6% and 11% respectively and key India industrials' peers by 30%. This was due to a lack of comparable operating leverage versus peers and guidance disappointment, Jefferies said in a note dated May 14.
However, the brokerage said the recent correction sets the stage for a 20% upside, driven by return on equity and growth. "As the year progresses, L&T should surprise on revenue guidance, with scope on order flow also," it said. "Shareholder-friendly measures of buyback and higher dividends add to the positives."
The brokerage has a 'buy' call for the stock with a target price of Rs 3,970 apiece, implying a potential upside of 17.47%.
Jefferies has raised its order-flow expectations of the current financial year by 5% after the guidance as the company surprised on order-flow growth materially in the last fiscal as against its original 10–12% growth guidance. Consequently, its sales-growth guidance is also tad higher than the guidance and closer to the order book growth at 18%.
Margin stabilisation will be led by higher-margin hydrocarbon and energy order book, which is seen at 25% as against 18% year ago, as it has a shorter gestation period. This will lead to a 20–30-basis-point uptick in margin in the current fiscal.
"We believe continuity on ROE and cash-flow improvement should add to shareholder-value creation and eventually reflect in higher multiples," the brokerage said.
Downside risks include no prudent capital allocation and reduced focus by the government on infrastructure spend, according to the brokerage.
L&T's stock rose 0.45% during the day to Rs 3,394.80 apiece on the NSE. It was trading flat at Rs 3,380 per share, compared to a 0.23% advance in the benchmark Nifty at 9:31 a.m.
The share price has fallen 4.10% on a year-to-date basis, but risen 53.3% in the last 12 months. The total traded volume so far in the day stood at 0.09 times its 30-day average. The relative strength index was at 39.77.
Thirty out of the 35 analysts tracking the company have a 'buy' rating on the stock, three recommend 'hold' and two suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 14.1%.
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