Buy This Large Cap Infra Stock For 24.5% Upside In 1-Year: Emkay Global

The brokerage’s take on Larsen & Toubro (LT)

Emkay Global has highlighted in its research report that "The metro currently makes a quarterly loss of Rs3.5-4bn, largely due to low ridership and high debt on books. At the end of FY21, it had an external debt of ~Rs140bn, with an average rate of interest of 9-9.5%. As per media reports, LT plans to raise up to Rs136bn through bonds and commercial paper. In the process, funding costs are likely to come down by ~200-250bps. This should lead to an annual interest cost savings of ~Rs3bn. LT is looking at various other options, including 1) stake sale of developed real estate (it has 1.3mn sqft developed real estate); 2) stake sale in the metro; and 3) support from the state government in the form of grants or claims. Earlier, the media also reported about a committee being formed in the state to take up the issue of pandemic impact on ridership. There has been news on some firms interested in buying a stake in the metro. In our view, in the medium term, LT will be able to meaningfully reduce the annual losses of the metro from ~Rs18bn."

According to the brokerage "Overall, Engineering and Infra space saw 20% YoY growth in ordering in H1FY22, but inflows in the first two months of Q3FY22 have been subdued (down 20-30% YoY) as last year had significantly large orders for high-speed rail. Tendering has improved from 5% YoY growth in H1FY22, with YTD growth improving to 17%, aided by a few large tenders. Even after ignoring these large long-term tenders, YTD growth stands at 11%."

Buy Larsen & Toubro Says Emkay Global Financial Services

According to the brokerage's research report "As per media reports (The Economic Times, 22-Dec-21), LT plans to raise Rs136bn through bonds and commercial paper for refinancing Hyderabad Metro (HM)-related debt. The average cost of debt for the metro is currently 9-9.5%. This will entail annual savings of ~Rs3bn, leading to lower losses at Hyderabad Metro. Further, HM's ridership has touched 250k per day recently - up from ~190k in Q2FY22. However, it still remains below pre-Covid levels of 400k. Apart from the refinancing of the HM loan, LT is looking at various other options such as the sale of developed real estate, stake sale in the metro, claims/grant from the Telangana government to minimize the losses."

The brokerage has claimed that "We reiterate Buy and raise the TP to Rs2,320 (Dec'22E) from Rs2,200, as we factor in the higher valuation of IT subsidiaries, in line with Emkay's valuation of LT Infotech and Mindtree. We also increase our FY23/FY24 EPS estimates by 3%/2%. While general awarding has been slow in the last few months, the pace of tenders has remained high, giving confidence in inflows for the fiscal year."

Disclaimer

The stock has been picked from the brokerage report of Emkay Global Financial Services Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.