Recommendations From Infrastructure Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

Larsen and Toubro Limited : BEEFING UP ITS ‘DEFENCES’

HERE IS WHY
☛Good growth prospects
☛Strong order book
☛Attractive valuation.

Larsen and Toubro Limited (L & T) is India’s largest engineering and construction company with interests in projects, infrastructure development, manufacturing, IT and financial services. The different segments have different drivers for growth. However, one can take a generalised view and link L & T’s growth with the infrastructure and development growth of the overall economy. Domestic economy will have a boost in infrastructure spending if the government wants to showcase India as an alternative to China. L & T will benefit from that action.

The company’s consolidated order book stood at Rs 3.03 lakh crore as on March 31, 2020, which translates into 2.8 times the revenues (adjusted for financial services and IT services business) of FY2020, providing healthy revenue visibility over the medium term. There is a tough macro environment for the construction industry and likely survival challenges for debt-ridden companies. Such an environment will result in consolidation in the industry with larger stronger players like L & T to emerge stronger in the post-pandemic era and further consolidate its market share in the Indian construction industry.

There are chances that L & T will get more orders going ahead with India trying to ramp up domestic infrastructure with symbolism of granting orders to an Indian company. L & T will surely be the best candidate to benefit from it. Recently the government started to ban import in the defence sector. It is estimated that contracts worth Rs 4 lakh crore will be placed upon the domestic industry within the next 6-7 years. L & T is expected to be one of the biggest beneficiaries of the import ban on 101 defence equipment. L & T Defence, a part of L & T, is India’s leading private sector company for the development and supply of defence equipment and systems.

For the quarter ended June 2020, the company’s gross sales increased 28.26 per cent to Rs 21,259.97 crore in Q1FY21 from Rs 29,635.95 crore in Q1FY20. Total expenditure for Q1FY21 stood at Rs 17,535.61 crore as against Rs 24,488.98 crore in Q1FY20, showing a decrease of 28.39 per cent. PBIDT, excluding other income, showed a decrease of 27.64 per cent to Rs 3,724.36 crore in Q1FY21 from Rs 5,146.97 crore in the same quarter last year. PBIDT margin, excluding other income, for Q1FY21 stood at 17.52 per cent as against 17.37 per cent in the same quarter last year.

PAT for Q1FY21 stood at Rs 645.07 crore as against Rs 1,972.52 crore in the same quarter last year, showing a decrease of 67.30 per cent. PAT margin for Q1FY21 stood at 3 per cent as against 6.28 per cent in the same quarter last year. ROCE for FY20 stood at 16.15 per cent. The stock is trading at PE of 15.93x. This is lower than its 10-year median PE of 24.03x and one-year median PE of 18.56x. The stock has good chances of PE expansion along with earnings coming in with the Indian government granting more contracts to India-based companies like L & T. By virtue of these factors, we recommend our reader-investors to BUY this stock.