L&T: dip an opportunity to accumulate

Larsen And Toubro, the capital goods major, has seen more than 10% correction in its stock price as concerns over plummeting oil prices impacting its order flow from Middle East have increased.

Out of around Rs 50,000 crore overseas order flows L&T bagged since FY13, Rs 43,750 crore is spread across Qatar, Saudi Arabia, Oman Kuwait and Abu Dhabi. So, the market concerns are valid. However, the same have been over-exaggerated, feel analysts.

They agree that some impact will be seen, specially in the hydrocarbon segment. But add that it will not be to the tune of what market is factoring.

The company’s diversified orders both segment-wise and country-wise provide some comfort. The concentration on a single large value order is also limited.

Analysts at Kotak Institutional equities, referring to IMF data, say that the data suggests that risks to orders may not be as severe as is currently perceived.

GCC (gulf co-operative council) countries where L&T has exposure are better-placed in terms of the government’s budgets, break even oil price, reserves and other macro data points, which give an indication of the health of the country.

Thus current infrastructure spending may not slow down significantly though some risks on onerous contracts in hydrocarbon segment worth about Rs 4,000 crore may remain, they say. Nevertheless apart from this segment, all other segments as roads and bridges, Power EPC , Electrification transmission and distribution, bridges and metro/railways all may not see that much of slowdown.

Analysts at Emkay say that given a large spend is also associated with specific events such as the FIFA-2022 in Qatar and Dubai World Expo in 2020, awards in the Middle East should continue.

But L&T will also have to bid aggressively in the domestic space to maintain its edge and insulate itself from global risks. The company’s diversified presence amongst various segments gives is an edge over peers and it is well placed to benefit from the economic pick-up.

Analysts at Macquire say that on the divergent occasions when crude prices have fallen, the top-5 sectors that have outperformed on average are financials, consumer discretionary, industrials, energy and consumer staples and L&T remains their top picks in the Industrial space.

While the company expects $25 billion consolidated order inflow in FY15 (up 20% YoY), analysts at Emkay estimate order inflow of 17%/16%/16% in FY15E/16E/17E ex-services order. These are to be driven by infrastructure, power and hydrocarbon segments that are expected to see order inflow CAGR of 10%/90%/65% over FY14-FY17E.

Defence orders could provide additional boost though in FY15 analysts don’t factor in much defence orders.

Emkay’s target price for the stock stands at Rs 1,741. The consensus target price as per analysts polled by Bloomberg since November 2014 stands at Rs 1,775. the stock is currently trading at Rs 1,532.55.