Tuesday March 11, 01:48 AM
L&T goes on a discount sale |
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Until end-February, the correction in Larsen and Toubro Ltd (L&T) shares was exactly in line with the broader market—both the Nifty and L&T fell by 15% year-till-date. But while the Nifty has corrected by another 8% this month, L&T shares have fallen by 22.5%.
Having corrected by nearly 40% from its highs in January, L&T shares are looking attractive at Rs2,728, especially given an average price target of more than Rs4,000 put out by five foreign brokers. At current levels, the stock provide an upside of 25% even if it were to achie-ve the lowest of these targets.
Also, the core business is now valued at around 15 times estimated earnings for fiscal year 2009-10, which analysts consider cheap since earnings are expected to grow at an average rate of more than 30% in the medium-term. (This is based on the most conservative estimate of Rs454 per share, among the five brokers, for L&T’s non-core businesses such as IT and finance and the value of its holdings in Ultratech Cement Ltd and its infrastructure subsidiary.) Some analysts have assigned a higher value for L&T’s various subsidiary companies, in which case the core business would appear even cheaper.
Coming to the reason for the bearishness in the L&T scrip lately, it’s important to note that the said losses on account of hedging commodity price risk would almost entirely be compensated by gains in the company’s core business. In the previous two years, it was the other way round, when margins in the core business were hit owing to higher commodity prices, but were partially offset by gains from the hedging activity. The net result remains the same. The problem, however, was that some analysts had estimated similar gains from hedging (as in the preceding year) in their earnings model. The fact that there would be losses instead came as a rude shock in these cases.
But more importantly, the outlook for the core business remains strong—besides a bulging order book, it now has new growth drivers in infrastructure projects, shipbuilding and power equipment. And even while a few brokerages have cut their earnings target, they’re still well above the current share price.
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