L&T Up 18% in Sept despite Downgrades by 4 Brokers

Shares of Larsen & Toubro have climbed sharply in recent weeks despite a spate of downgrades by major brokerages. L&T, India's largest engineering and construction company, has climbed nearly 18% so far this month compared with a 6% gain for the benchmark Sensex.  Four major brokerages — Credit Suisse, Merrill Lynch, JP Morgan and Goldman Sachs — have donwgraded the stock, citing a variety of factors, including high valuations, muted order inflow and Chinese competition. While Goldman Sachs removed L&T from its Asia-Pacific 'Buy' list last Friday by downgrading its ratings to 'Neutral', JP Morgan and Nomura lowered their ratings to 'Underweight' from 'Neutral' and from 'Buy' to 'Reduce', respectively. Absence of buying opportunities in the market combined with the belief that the economy may turn around following the burst of reforms from the government are helping the stock. Business challenges notwithstanding, some investors think that L&T is still the best pick in the stress-laden capital goods sector. L&T shares, which were trading at . 1,341 at the end of August, touched its year high of . 1,616 on Monday before ending down 0.44% at . 1,577.  "The negatives that were anticipated in L&T's main businesses have been factored in. The recent reforms announced by the government indicate that order execution may pick up and there may be some recovery in industrial capex, which will boost order inflow," said Gaurang Shah, assistant vice-president, Geojit BNP Paribas Financial Services.  In an attempt to de-risk business from the slowdown in the local market, The $12.8-billion conglomerate has in the past two years expanded its presence in the Middle East for hydrocarbon, power transmission & distribution and infrastructure projects.  L&T's revenue Q1FY13 rose 26% y-on-y to . 12,078 crore, driven by a pick-up in order execution and a robust order book. Recurring profit-after-tax stood at . 890 crore, up 19%. Its order book was worth . 153,095 crore as of June-end. It has guided that its order inflow in FY13 will be 15-20% higher than . 70,574 crore reported a year ago. But analysts believe the guidance may be optimistic, particularly after it missed annual guidance for FY12. At the beginning of FY12, L&T had forecast an order inflow guidance of 15-20%, cut it to 5% subsequently and finally ended the year with a 12% decline.  Geojit's Shah cautions that gains will remain capped in short-to-medium term as valuation appears expensive, and longterm investors may look at entering the stock at . 1,300-1,350. "L&T has been an investor-friendly company, which announced bonus and dividends. There is comfort about its diversified portfolio and geographical expansion," he said.  "L&T is arguably India's best play on the infrastructure and corporate capex cycle. However, an unfavourable macro-environment and impediments on new orders driven by policy paralysis across sectors plague L&T's medium-term growth and margin outlook," he said.