Wednesday, 6 January 2016

A New Beginning :2016 Value pick 3

We have already given two value pick for 2016. Please check previous post for that.

Now let’s start with another value pick:

Larsen and Toubro:
CMP: 1239(6th Jan 16)

     L&T is the biggest player in Construction and heavy engineering. Stock has touched 52-week low which makes it more attractive for investor. In current state L&T is well placed for an earnings recovery and improving RoE on the back of:

  •   Management’s decision to change the company’s focus to asset light businesses and unlocking value from its subsidiaries/JVs over the past two years and going forward (real-estate, Dhamra & Kattupalli ports, L&T Finance, L&T Infotech). 
  •   A pick-up in execution in long-gestation projects to drive 20% revenue CAGR over FY16-18F in the core E&C business, in our view. Unlike orders in the power equipment sector, we think L&T’s order backlog is only ‘slow-moving’ or even ‘slow to start’ rather than ‘non-moving’ as in the case of BHEL
  • Margin recovery as several long-gestation orders reach margin recognition thresholds coupled with tailwinds from the decline in commodity prices.
  • With bulk of the problems now behind the company, we expect earnings pick up from FY17F and estimate 35% EPS CAGR for L&T over FY16F-18F.(Source:

        L&T is exposed to several levers across business/geographic segments and has emerged as the E&C partner of choice in India, which provides a robust foundation to capitalize on the next leg of the investment cycle. Manufacturing businesses (like Shipyard, Power BTG, Forgings, etc) also present interesting possibilities in the longer term. Many of these businesses are difficult to replicate and LT is strongly positioned as a dominant player.

According to the company, its unexecuted order book stood at an all-time high of INR232,649 crore and represents a 28 per cent growth over the order book at the end of the previous year.

For L&T near-term outlook is weak; but long-term growth story remains intact. One can enter at this level and stay invested for 3-5 years to get good return.

Be Smart. Invest Smartly