In stock market parlance, only on rare occasions do investors find the cost of a good stock close to its actual value. Both technical and fundamental indicators suggest the pessimism surrounding the infrastructure space has beaten down the stock prices of even blue chips like Larsen & Toubro (L&T). Given that infrastructure projects have dried up, and clearances are stuck even for existing projects, the market is reluctant to pay the kind of premium it was willing to pay for infrastructure stocks earlier. This pessimism has shaved off the premium L&T commanded.
The company is trading at a 33 per cent discount to its four-year historical average price/earnings multiple. The stock used to trade at a 40 per cent premium to the Sensex but is now down to five per cent. Such pessimism, analysts say, was last seen in March 2009. According to broking firm Systematix, “L&T is presently trading at key support levels. It is evident from the previous price action that whenever this average is tested, prices have a tendency to bounce back. We expect L&T to bounce towards Rs 1,435-1,450 levels, which is an important resistance for the stock.”
At the end of FY12, the company had said order inflows would grow at 15-20 per cent year-on-year (y-o-y), which the market found rather optimistic. However, a couple of months down the line, it appears some triggers may benefit the company. For starters, the government is trying to remove bottlenecks that ail the sector. Second, analysts believe a 15 per cent y-o-y growth in top line is achievable as FY13 is a pre-election year, and there might be an increased focus on infrastructure.
According to Enam’s June strategy report, the inflow expectation would be possible if orders of Rs 12,000-15,000 crore in The March quarter and the first half of 2011-12 were to happen. Also, apart from domestic infra spending, if the company gets export orders (rebuilding) from West Asia (Iraq, Libya and FIFA in Qatar), it would help meet its guidance. Espirito Santo Securities, however, is betting on nine per cent y-o-y growth in order inflows in FY13. However, the risks of continued slowdown and higher competition remain in place.
Despite the broader slowdown in the infrastructure space, sub-segments are doing well. For instance, order inflows in roads, rapid transit systems, oil and gas, and power transmission and distribution are still good. According to Espirito Santo Securities, “The ministry of railways expects orders of $3 billion for DFC in FY13 and L&T is among the few to be prequalified for the Western Corridor. Post the success of Delhi Metro, rapid transit systems are being finalised across many cities. ONGC has a planned outlay of $33 billion over the next five years, and NHAI and PGCIL have a steady order outlook.”