Buy Larsen & Toubro - CMP: Rs.1464, TP: Rs.1704 - Prabhudas Lilladher

At attractive valuations: L&T is certainly facing the turmoil of a slow economic growth environment. With a recent price fall (3M underperformance - 12.2% relative to Nifty and 13.7% on Absolute basis), despite a healthy set of announcements in the recently announced Budget, L&T is trading at P/E of 10.7x FY15E core earnings. However, with the recent news flow in terms of order intake being positive, L&T looks on a comfortable wicket and poised to end the year with a 15% order inflow growth. Hence, we believe that the sheer underperformance is unwarranted for an infrastructure giant like L&T.

Order book at comfortable footing: Order wins in Jan-Feb 2013 were close to Rs39bn which were a mix of B&F (Government), Defence, Hydrocarbon and Power. Further, with the impetus given to DMIC, DFC and other BOT projects in transportation (Budget 2013-14), along with a strong financial backing, we expect L&T to be able to secure sizeable orders. Though we have not factored in a major downfall in the EBITDA margins (11%) over FY14E-15E, we have also not kept it higher. However, any adverse mix in terms of order inflow may alter the margins. We are expecting a 10% CAGR in standalone earnings for the period of FY12-15E which is again not an out-of-reach assumption.

Valuation still in safe zone: Though the price points have corrected sharply in the recent times, we see these levels as an entry point/increasing exposure to a stock in volatile times. At CMP, the stock is trading at a core P/E of 11.8x FY14E and 10.7x FY15E. We have also rolled over our valuations to FY15E.

Source : Equity Bulls

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