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STOCK UPDATE Larsen & Toubro
Recommendation: Buy
Price target: Rs1,385
Current market price: Rs1,230 Multiple expansion on TINA effect and improving growth outlook Key points -
Larsen and Toubro (L&T) is the best among the cyclical stocks because of its ability to sustain growth in order inflows (and consequently in revenues and earnings) in spite of an extremely challenging domestic macro environment. -
The recent order wins will result in a growth of over 15% in the order inflows in FY2014; the demand outlook for FY2015 and FY2016 is expected to improve on account of a possible revival in the domestic economy and growing investments in infrastructure in the Middle-East (two mega events-Expo 2020 in Dubai and FIFA World Cup in Qatar, are around the corner) where L&T has a strong foothold. -
Despite the recent run-up, the stock's valuation is at a discount to its 10-year average premium over the Sensex' multiple which leaves scope for further re-rating. Consequently, we upgrading the multiple of the stand-alone entity to 16.5x FY2016E earnings. We also add Rs371 per share for the company's investments in subsidiaries. Thus, the fair price works out to Rs1,385.
VIEWPOINT TTK Prestige
View: Positive
Current market price: Rs2,853 On the cusp of a rebound Key points -
This fiscal has been a watershed year for the company, mired by multiple factors like: (a) the macro economic slowdown and moderation in the consumer discretionary spends; (b) the adverse policy changes and power shortages affecting the sales of induction cooktops. Consequently, the stock has underperformed significantly. -
On the back of new product and category launches, a lower base effect and the improving consumer confidence, we expect the revenues and earnings to rebound in FY2015. The consensus estimates expects the revenues and earnings to grow at 20-25% (rough estimates). -
An integrated kitchen appliance company with a market leadership position in key categories, strong innovation and execution capabilities, and a robust balance sheet and financial profile, the company is trading at an 18-20% discount to its historical PE band. Given the fact that the revival in the financial performance would be back-ended in FY2015, we believe the stock is trading at an attractive consumer play that can be accumulated by investors with a 12-month price target of close to Rs3,500 (based on its average PE band for the last five years).
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Regards,
The Sharekhan Research Team |
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