L&T: Accumulate at every dip

Correction could be used to accumulate the stock

Larsen & Toubro (L&T) fell 10 per cent in eight trading sessions, as falling crude oil prices threaten its order flow from West Asia. It has recouped some losses but is still down seven per cent. Analysts believe the correction is an opportunity to accumulate the stock, as the impact of weak oil prices will be negligible and the company’s prospects remain healthy.

Of the Rs 50,000-crore foreign order flows it has bagged since FY13, Rs 43,750 crore is spread across Qatar, Saudi Arabia, Oman, Kuwait and Abu Dhabi. So, the market concerns are valid. However, these have been exaggerated, feel analysts. They agree on some impact, especially in the hydrocarbon segment but not to the tune of what the market is factoring. Diversified orders,  both segment-wise and country-wise , provide some comfort. Concentration on a single large value order is also limited. Analysts at Kotak Institutional Equities, referring to International Monetary Fund data, say the data suggest risks to orders might not be severe. The Gulf Cooperation Council countries, where it has exposure, are better placed in terms of government budgets, break-even oil price, reserves and other macro data points.

Thus, current infrastructure spending might not get significantly slower, though some risks on onerous contracts in the hydrocarbon segment of Rs 4,000 crore could remain, they add. Other segments such as roads and bridges, power EPC, transmission and distribution, bridges and metro/railways might not see much of slowdown.

Analysts at Emkay also point to the large spending associated with specific events such as FIFA-2022 in Qatar and the Dubai World Expo in 2020. But, L&T might have to bid aggressively in the domestic space to maintain its edge and insulate itself from global risks. Its diversified presence gives an edge over peers and it is well placed to benefit from the expected pick-up in the economy.

Analysts at Macquarie say on divergent occasions when crude oil prices have fallen, the top five sectors which had outperformed on the average are financials, consumer discretionary, industrials, energy and consumer staples. L&T remains their top pick in the industrial space.

While the company expects $25 billion of consolidated order inflow in FY15, up 20 per cent over a year, analysts at Emkay estimate an order inflow (ex-services) growth of 16-17 per cent each in FY15/16/17, driven by the infrastructure, power and hydrocarbon segments. Defence orders could provide an additional boost though from FY16.  Emkay’s target price for L&T is Rs 1,741. The consensus according to analysts polled by Bloomberg since November stands at Rs 1,775 for the stock, currently trading at Rs 1,521.