L&T share price jumped more than 1% on Friday to hit an intraday high of Rs 1,903 on NSE. The stock has been in focus ever since the company announced, earlier this week, that it will invest up to $2.5 billion in its green portfolio in the next 3-4 years and supply components to offshore wind farms. Subramanian Sarma, senior executive vice-president (energy) at L&T, said, “We plan to invest up to $2-2.5 billion to start with, over the next 3-4 years, depending on how the markets evolve. This would be across green hydrogen, solar and wind projects.” In the last month, L&T share price has rallied more than 8% and analysts see further upside of up to 25% going forward.

Stock may rally 25% in 12 months

The company said recently that its focus has directionally been towards creating stakeholder value. Active E&C portfolio rationalisation, site-level cash flows, exit of non-core, better clarity on capital allocation and sharper sustainability focus are some key initiatives that are expected to make a material difference going ahead. According to analysts at Edelweiss Securities, while L&T, in the recent past, has moved directionally with its IT subsidiaries, expanding growth avenues, potential for a reasonable return/cash flow scale-up, should drive shareholder value creation going ahead. The brokerage retains ‘Buy’ rating on the stock with a SoTP-based target price of Rs 2,370, implying a 25% upside.

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Investment Rationale

Diversified business dominance imparts unique flexibility: According to the Edelweiss report, L&T has a dominant position and market share in most operating verticals, be it transportation, oil & gas, factories & building, process projects and industrial structures. “This imparts flexibility to cherry-pick projects, which helps optimise overall business profitability,” it said.

Transportation, factories and buildings segments to drive growth: Strong projects pipeline over the next five years in verticals like transportation (railways, metro and roads) and factories and buildings augurs well for L&T. Moreover, proven execution record and huge balance sheet equip it to garner a higher share of the huge Rs40 lakh crore infra capex opportunity over FY21-23.

Cash flow/RoE focus: The brokerage also noted that L&T has been amongst the few players to exit from non-core businesses generating huge balance sheet muscle over recent years. “Utilisation of these proceeds, including incremental surplus from E&C cash flows to reward stakeholders could generate reasonable stake-holder returns in our view,” it said.

Key Risks

Weakness in domestic investment could impact Edelweiss’ current growth assumptions and award of large projects and thus pose a downside risk, especially spending from states given higher sensitivity for L&T. Additionally, L&T faces a daunting task of return optimization given cyclical challenges and several sub-optimal manufacturing assets (shipyard, forgings, power JVs etc). Any further deterioration or slower demand ramp up remains a key risk, according to the analysts.

Meanwhile, HDFC Securities also has a buy call on Larsen & Toubro with a target price of Rs 2,135. Time period given by the analyst for when the stock can reach the defined target price is one year. 

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(The stock recommendations in this story are by the respective research analysts and brokerage firms. FinancialExpress.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)