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Stock pick of the week: Govt's infrastructure push will be positive for L&T

L&T is expected to grow faster in the coming years after the recently announced infrastructure push. The company’s reasonable valuation and continued growth even during the difficult phase of infrastructure growth has made it a favourite of analysts.

, ET Bureau|
Jan 13, 2020, 06.30 AM IST
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Government’s infrastructure push should allay market’s concern about lower order inflows.
Owing to the fiscal woes of the central and state governments, orders to the infrastructure companies have declined sharply. This explains why Larsen & Toubro (L&T) has failed to participate in the recent large-cap rally in the stock market.

As is visible from the Relative Performance Chart, L&T underperformed Sensex by more than 19% during the last one year. However, market sentiments towards infrastructure companies improved after the recent announcement by the government earmarking Rs 102 lakh crore for pending infrastructure projetcs during 2020-25.

The projected infrastructure spending, which is almost double of what was spent during 2014-19, is to make India a $5 trillion economy. This will increase India’s infrastructure spending to 6.2% of nominal GDP over 2020-25 from 5.6% over 2014-19. Centre’s infrastructure expenditure shall also increase from 1.8% of nominal GDP in 2019-20 to 2.7% by 2024-25.

Though there is still doubt about its full implementation, because around 61% of the infrastructure spending is expected to come from state governments and private sector, this infrastructure push will be a big positive for L&T.

This is because L&T is almost a monopoly in the engineering and construction space now and its domestic order book of Rs 2.3 lakh crore is more than the combined order book of the next five domestic engineering and construction players. More importantly, L&T can participate in more than 80% of the projects announced under the new infrastructure push.

L&T is no more an infrastructure company only as it has exposure to several other businesses too through its subsidiaries. These include financial services, information technology, etc. L&T is also asset owner in some projects like Hyderabad Metro, Nabha Power, etc. The consolidated revenue of services businesses is expected to get a major boost in the coming years, mostly because of acquisition of MindTree.

Reasonable valuation is another factor that is attracting analysts to this counter. For instance, its adjusted PE ratio (ie adjusted for the values of its subsidiaries) is placed much lower than its long-term historical average now. L&T’s continued growth even during the difficult phase of infrastructure growth, is the next factor.

For instance, the order book of L&T grew by 8% during the second quarter of 2019-20. Faster growth by hydrocarbon segment (up by 85% y-o-y) and power segment (up by 63% y-o-y) helped L&T achieve this. Due to the infrastructure push, the order book of L&T is expected to grow faster in the coming years.

Analysts’ views
  • Buy: 39
  • Hold: 2
  • Sell: 1


Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.

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