Larsen & Toubro (L&T) shares’ expensive valuation may not allow for great upside and this is the reason HDFC Securities has downgraded the stock to ‘neutral’ with a target price of Rs 1,777 versus a market price of Rs 1782.00 (as of 29 May 2017). “Valuations are expensive, which leave little room for meaningful upsides. Losses post Hyderabad metro commissioning is the key risk to earnings in FY19E. Downgrade to NEUTRAL with an SOTP-based TP of Rs 1,777 (20x Mar-19E EPS for core EPC business),” said HDFC Securities in a research report.
Yesterday the stock price of the engineering giant rose 1.27% to Rs 1,810 making a fresh 52-week high, after the company reported a 28% on-year basis growth in consolidated net profit for the fourth fiscal quarter of the Financial Year 2017, beating market estimates, as the steep fall in tax costs and higher revenues boosted bottomline.
L&T’s January-March quarter profit was at Rs 3,180 crore against Rs 2,482 crore a year earlier. During 2016-17, the company recorded a 43% jump in net profit at Rs 6,041 crore. Total income from operations rose 12 percent to Rs 36,828 crore. Consolidated total income for the fourth quarter in the fiscal year 2017 was Rs 37,227 crore against Rs 33,021 crore in the corresponding quarter of the fiscal year 2016.
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“L&T’s 4QFY17 results were in line with our estimates at the operating level (E&C rev growth of ~13%; EBIT margins of 11.8%). However, lower interest cost/taxes and higher other income led to APAT growth of ~46% YoY to Rs 33bn,” HDFC Securities said on L&T’s Q4 results.
The brokerage house said that L&T’s revenue growth was led by a 52% growth in other segments due to strong execution of material handling orders. However, the company’s performance in the core infra segment was a bit subdued, with 8.2% on-year growth in Q4 FY17 and 6.7% on-year growth in FY17.
HDFC Securities said that L&T’s stock could witness further upside in the near term due to a strong guidance and a bonus issue.
“Order inflows grew 9% YoY (Rs 473bn), leading to an order book of Rs 2.6tn. This represents a completely executable order book, as L&T has dropped slow-moving orders worth Rs 180bn in 4QFY17. Mgt has given a strong guidance for FY18E of revenue/ order inflow growth of 12 /12-15% respectively,” the brokerage house said in its report.