The Hindu Business Line : Sensex inclusion may build up L&T

ALMOST two weeks after being re-listed, the new avatar of engineering and construction major L&T, which has been attracting significant attention on the bourses, is expected to gain further ground with its inclusion in the Sensex from July 8.

Dealers said that while strong fundamentals have been driving interest so far, a ramp-up could be expected in the counter from July 8. "It will compulsorily become part of all the index fund portfolios. And given the low floating stock, this should impact the stock price positively," said a broker.

Post Tuesday's Railway Budget, the counter showed signs of further strength, which was attributed to the 10 per cent freight rebate on transportation of heavy machinery.

The stock was re-listed on the bourses on June 23, when it was quoting at around the Rs 635-636 levels. Since then it has appreciated by almost 14.9 per cent to its current levels of Rs 730. On a week-on-week basis, the counter has gained by almost 9 per cent from around the Rs 670 levels on June 29 to its current levels of Rs 730.

Despite the CMD, Mr A.M. Naik's comment at a public forum recently that the company has no visibility after the fourth quarter (March 2005), analysts believe otherwise. "The increase in order backlog to an all-time high of Rs 177 billion and the continued robust order booking is expected to help L&T report 22 per cent growth in revenues for the next two years," said analyst Mr Srinivas Rao of Motilal Oswal Securities.

Besides, the order mix is tilting towards higher profit margin projects from oil and gas and process industries. "As oil and gas and process industries begin to constitute a higher share of revenues, we expect overall EBITDA (earnings before interest, tax, depreciation and amortisation) margins to expand from 7.7 per cent in fiscal '04 to 8.2 per cent in fiscal '05 and 8.6 per cent in the fiscal '06," he added. Mr Rao has set a target price of Rs 814.

Analysts maintain that hiving off the capital-intensive cement business has also led to higher returns on equity (RoE) and return on capital employed (RoCE) in the financial year 2004, and further improvement is expected. There is a perception that the RoE and the RoCE will improve by 22 per cent and 22.6 per cent, respectively in fiscal '05.

Even as the company's focused approach has many a broking house putting out a `buy' call on the stock, there are concerns on the lack of clarity on the trend in operating profit margins. The stock ended the day at Rs 730.25, up 1.39 per cent, with around six lakh shares traded on the BSE.