Analysts remain positive on L&T despite near-term headwinds

Our Bureau Chennai | Updated on June 08, 2020

G Ramakrishna

Expect the engineering conglomerate to bounce back post Covid-19

The shares of Larsen & Toubro, which jumped sharply in early trade on Monday post Q4 results, could not hold on to the gains despite analysts remaining positive on the counter. After opening at ₹979.5, they hit a high of ₹995 intraday on the NSE before settling at ₹960.

One of the reasons for the decline is the general market condition, said analysts.

L&T on Friday post market hours, announced a 4.4 per cent decline in its consolidated net profit at ₹3,430.1 crore for the Q4 of FY20, against ₹3,586.48 crore reported a year ago. Its consolidated total income increased to ₹44,905.76 crore (₹43,914.37 crore).

Though analysts acknowledge near-term headwinds for L&T, especially on net working capital (NWC), they believe the company will weather the storm and come out strongly, in the post Covid-19 period.

According to Motilal Oswal Financial, “Despite weak outlook on revenue and margins in FY21, we do not see free cash flow for the core E&C turning negative from hereon as we expect the company to choose working capital management above revenue growth. However, there may be funding risk for non-core businesses such as L&T Finance Holdings or Hyderabad Metro.”

Though it retained its ‘buy’ rating on L&T, the domestic broking firm reduced the target price to ₹1,120 from ₹1,200.

JP Morgan, which maintain its overweight stance on L&T and a price target of ₹1,135, said working capital deterioration was broadly in-line and it expects growth to revive in the later part of FY21.

Improving labour situation

HDFC Securities said the labour situation is improving now with 1.2 lakh labour at site versus a low of 70,000, and is expected to ramp up to 1.7 lakh by June-end and 2.2 lakh by July.

“L&T continues to balance growth and NWC discipline and doesn’t see achieving long-term 10-15 per cent growth and sub-23 per cent NWC a challenge. The Schneider deal is on track with likely closure by early Q2 FY21, the deal proceeds of which may partly get utilised towards right-sizing L&T Hyderabad capital structure. We thus, increase the price target to ₹1,236 (from ₹1,191 earlier),” HDFC Securities said.

Emkay Global said it believes L&T is well-placed to emerge stronger from the slowdown as it has historically gained market share during periods of crisis. However, it revised the target price to ₹1,103 (₹1,127 earlier), despite maintaining its ‘buy’ rating on the stock.

ICICI Securities, on the other hand, reduced the rating to ‘hold’ from ‘buy’. L&T reported decent order inflows, which provides strong revenue visibility for two to three years. However, execution challenges amid Covid-19 could have some impact in the near term. Also, preservation of working capital levels would be closely monitored to maintain comfort on the balance sheet front with a revised target price of ₹1,090.

JM Financial remains positive on L&T, given inexpensive valuations and term growth with a ‘buy’ rating and a target price of ₹1,240, while for YES Securities, the target price is ₹1,203.

Published on June 08, 2020

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