Price target for L&T at Rs 1,416

By: |
February 23, 2016 12:15 AM

According to media reports, a consortium of Larsen & Toubro (L&T), Sojitz and Gayatri have emerged as the lowest bidders for civil construction work of the Iqbalgarh-Vadodara...

According to media reports, a consortium of Larsen & Toubro (L&T), Sojitz and Gayatri have emerged as the lowest bidders for civil construction work of the Iqbalgarh-Vadodara stretch of the Western rail freight corridor, with a bid of Rs 4,700 crore.

If it comes through, this would be L&T’s third win in the Dedicated Freight Corridor project.With the railways planning to complete ordering out of 100% of the Western DFC contracts and 85% of the Eastern DFC contracts in F4Q16, the opportunity size is significant.

This will dovetail into therailways plan to spend $132 billion over F15-19e (see our report, The Next India: Industrials – The Return of the Transportation Behemoth, dated November 25, 2015). With L&T seeing inflows from the DFC and metros (India and MENA), we continue to highlight the company as a significant beneficiary of the opening up of the railway vertical.

We use a relative P/E (relative to the market) methodology to determine the base, bull and bear case scenario values for the company, and then use a probability-weighted method to come to our price target of Rs 1,416 for L&T. To account for our belief that macro environment’s bottom is behind and our view that visibility on capex is improving, we assign a higher probability to our bull case than to our bear case.

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