On Friday, Shares of Larsen & Toubro (L&T) moved higher by 4 per cent to Rs 1,664.75 on the BSE in intra-day trade after brokerage firm Motilal Oswal Financial Services increased the target price of the stock to Rs 1,950, largely driven by mark-to-market (MTM) of listed information technology (IT) subsidiaries. The stock of the engineering & construction (E&C) company had hit a record high of Rs 1,676.70 on August 16, 2021.
“In the past month, L&T Infotech has rallied 18 per cent, MindTree 28 per cent, and L&T Technology Services 11 per cent. Factoring in the current market prices of the listed subsidiaries (after applying an unchanged holding company discount of 20 per cent), our target price for L&T now stands at Rs 1,950,” Motilal Oswal said in a stock update.
Adjusted for the valuation of subsidiaries, the core business is available at FY23E PE of 13.5x v/s the long-term one-year forward average PE multiple of 22x, the brokerage added. It has a Buy rating on the stock. L&T is our top pick in the wider Capital Goods sector as a proxy to play India’s Capex story, the brokerage firm further noted.
“L&T’s core E&C business remains best placed to benefit from any Capex upcycle, supported by its leaner asset-light business model and diversified segments. Therefore, even as the Buildings and Power segments were weaker in FY21, this was largely offset by strong orders from the international Power Transmission & Distribution (T&D) and Hydrocarbons segments. L&T’s capability to win large ticket size projects, such as airports and high-speed rail (HSR), has been remarkable and has compensated for its exit from the roads sector,” Motilal Oswal added.
Over the next two years, the brokerage sees multiple catalysts emerging for L&T, including asset monetization for Hyderabad Metro and Nabha Power, free cash generation (FCF) generation of USD1.5–2.0 billion per annum in the core business, an improvement in order inflows prior to the elections, and improved execution, aided by a better working capital cycle – as the government focuses on Capex towards economic growth and job creation.
If the macro improves, the strong FCF generation should enable L&T to hike dividend payouts as there is hardly any Capex requirement beyond the maintenance Capex, the brokerage firm said.