Larsen & Toubro Reclaims Rs 3,000: What's Next For The Stock?
UBS expects L&T to deliver improved revenue billing and operating profit margin to drive FY23–26 core earnings growth to 32%.
Shares of Larsen & Toubro Ltd.'s hit a record high on Thursday after UBS Research raised the target price by over 23% from the previous day's closing price.
The brokerage raised the one-year target price from Wednesday's closing price of 2,965.05 to Rs 3,600 apiece, citing cyclical earnings momentum, improving capital allocation, and stakeholder focus while maintaining a 'buy' rating.
It cited the strong infra cycle reflected by the best order-inflow growth for many quarters, execution rate and operating profit margin at the cycle trough, and management's focus on faster project closures, according to a note on Wednesday. "We expect L&T to deliver improved revenue billing and operating profit margin to drive FY23–26E core earnings growth to around 32% (10% over the past five years)."
UBS said the company's initiatives, including divestments, the Hyderabad metro turnaround, and core net-working capital, have "potential to surprise positively" at the profit and loss and balance-sheet levels over the next two to three years. "We are above consensus in terms of pace of execution and ramp-up of operating profit margin for L&T's core business."
The brokerage's three-year Ebitda compounded annual growth rate is around 700 basis points higher. It said L&T has enough orders and an improving supply chain with a resilient macro to record an acceleration in earnings compared to the past few years.
Underscoring the macro support to the companies, the brokerage said it remains "comfortable" on parameters like liquidity and tax collection, policy intent, and direction to support capital expenditure. "Post our comprehensive study of L&T's approach to growth and strategy over the past three decades, we believe the company has learned from history as it navigates the medium- to long-term growth path, which should offer both superior growth and rising returns for investors."
Short- To Medium-Term Risks
Near-term election cyclicality may have an impact on the order cycle.
Rising concentration in Saudi Arabia is a risk to profitability.
Liquidity and macro stability is a risk to working capital and allocation to infrastructure spend.
Shares of L&T rose as much as 2.88% during the day to a record high of Rs 3,050.50 apiece. The stock was trading 2.02% higher at Rs 3,025 apiece, compared to a 0.42% decline in the benchmark NSE Nifty 50 at 12.20 p.m.
The stock first hit Rs 3,000 apiece in intra-day trading on Sept. 12.
Thirty-seven out of the 40 analysts tracking L&T maintain a 'buy' rating on the stock, one suggests a 'hold', and two recommend a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 18.5%.
