We attribute three reasons, global orders, valuations and capex cycle, for upgrading Larsen & Toubro (L&T) shares to 'buy'. With the domestic economy stuttering, the company has quickly reoriented itself to secure more overseas projects.
L&T is targeting +10% domestic and +67% global orders in FY14. Winning R88,000-crore (+25% YoY) of orders in FY13 and targeting +20% YoY of orders in FY14E, despite a weak macro, reflect L&T’s diverse skills, large backlog and strong B/S. Upgrade to 'Buy' from 'Neutral' with a target price of Rs 974 (from Rs 1,007).
L&T is down 30% YTD, underperforming the BSE Sensex 25%, and trades at an FY14E adj core P/E of <10x. It has historically traded at a premium to global peers, but post its recent correction it is on par. Given its liquidity and large cap, and the lack of alternatives, L&T tends to be a preferred stock for those seeking exposure to India’s industrials/E&C/ infrastructure sectors.
Given the current momentum, though, one cannot rule out an inflow beat in FY14, a weak 2Q is widely anticipated. That shipbuilding, nuclear forging, roads, metro and port subsidiaries will be a drag on consolidated EPS is also well known. Key upside risk is any potential divestment from subsidiaries.
If history repeats itself, the current domestic capex cycle should rebound in early FY16E and benefit market-leader L&T.