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Five reasons why L&T shares are under selling pressure

Shares in L&T, India's biggest engineering and construction firm, traded lower for the fourth day in a row on Tuesday. The stock has witnessed a spate of downgrades over the last few days. L&T shares have fallen over 6.5 per cent in the last month against 1.5 per cent gains in the Sensex.
Here are the reasons for the selling in L&T shares:
  1. Slow moving orders: Bank of America Merrill Lynch said on Monday that L&T has risk to growth as slow orders balloon. Slow moving order book forms 12-52 per cent of L&T's total order book. Private clients of L&T like GVK and GMR are trying to get out aggressively, BofA-ML said. GMR, which had placed orders worth Rs 2,164 crore with L&T for an NHAI highway project, may cancel orders.

  2. Risk to growth: Nomura, citing December CMIE data, said new project starts and total projects outstanding data are now at almost similar levels as 2004. Projects under implementation and new project starts are going down at the same time for the first time since June 1995, and indicates that unless new project starts activity picks up in a big way very soon, project execution rate will start falling at a sharp pace in about 18-24 months from now. Nomura has a "reduce" on L&T with a target of Rs 1,100.

  3. Rate cut may not rejuvenate stock: 2013 could be a year of some good news with likely interest rate cuts, commodity price cool off and central government reform push boosting infrastructure orders from current lows. However, new project starts will pick up only with a lag, Nomura says.

  4. Citi downgraded L&T to "neutral" from "buy" with a target of Rs 1,732 saying the stock is unlikely to outperform in 2013. Domestic slowdown and lower international margins will limit upside, Citi added. Barclays, too, has downgraded L&T to "equal-weigh" from "overweight" and cut its target price by 5 per cent to Rs 1,750.

  5. High valuations: The project starts data is now heading towards pre 2004-05 era in contrast to L&T's valuation which is much higher at nearly 18-times 1-year forward price/earnings versus pre-2004-05 1-year forward P/E of less than 14-times, Nomura says.

Story first published on: January 08, 2013 11:42 (IST)

Tags: L&T, Larsen & Toubro

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