JPMorgan has initiated coverage on Larsen & Toubro (L&T) with an 'Overweight' rating, setting a target price of ₹4,360. The brokerage's bullish stance is based on L&T's promising earnings growth potential and robust order book, which position it favourably in the current capital expenditure cycle in India and the Middle East.
JPMorgan's positive outlook on L&T
JPMorgan’s 'Overweight' rating on L&T suggests that the stock is expected to outperform its peers in the industry. The investment bank cited the ongoing capital expenditure cycle as a significant growth driver, making L&T an appealing choice for those looking to invest in stocks. With its large exposure to sectors like infrastructure and construction, L&T stands to benefit from increased spending in these areas.
Analysts at JPMorgan pointed out that the bottoming out of Plant and Machinery (P&M) margins will support future earnings, setting the stage for sustained revenue growth. The firm is projecting L&T’s core revenue to grow by 16% over the next few years, accompanied by a 60 basis points expansion in core margins between FY24 and FY27. These factors are expected to drive robust growth in the company’s earnings per share (EPS).
Recent order wins add to the growth momentum
Adding to its promising outlook, L&T recently secured a ₹1,000 crore order from Rashtriya Chemicals and Fertilizers Ltd (RCF) to construct a 1200 MTPD (DAP basis) complex fertiliser plant in Thal. The project, which will be carried out on a lump-sum turn-key (LSTK) basis, is set to be completed within 27 months. This order win highlights L&T's continued success in capturing substantial projects, further reinforcing its growth trajectory and appealing to those looking to invest in stocks.
Long-term growth potential backed by order book expansion
R Shankar Raman, L&T’s Chief Financial Officer, has projected a fourfold increase in the company’s current $60 billion order book over the next 25 years. He also emphasised the importance of reducing the 'life cycle cost' of infrastructure projects to unlock higher value. L&T’s ongoing efforts to shorten project completion times will help reduce overall costs and enhance the appeal of infrastructure investments in India.
L&T’s view on the economic landscape
During its recent fiscal second-quarter earnings call, L&T expressed optimism about the Indian economy, describing it as being at an inflection point. The company foresees transformational changes that could bring stability and support growth, benefiting companies like L&T involved in the infrastructure sector. These developments make L&T an attractive choice for investors who are keen to invest in stocks with strong growth prospects.
Stock performance: Steady gains but lagging behind Nifty
L&T’s stock ended nearly 1% higher at ₹3,491.90 on the National Stock Exchange (NSE) in the previous session. Although the stock has fallen almost 1% so far this year, it has risen by around 12% over the past 12 months. In comparison, the Nifty index has delivered a return of 26% during the same period, highlighting the stock's underperformance. Despite this, JPMorgan’s 'Overweight' rating suggests a potential upside for those looking to invest in stocks with a long-term growth perspective.
Conclusion
JPMorgan’s coverage initiation and 'Overweight' rating on L&T indicate confidence in the company’s ability to capitalise on growth opportunities. With strong earnings growth potential, a robust order book, and favourable macroeconomic conditions, L&T presents a compelling case for investors who aim to invest in stocks with a solid foundation for future gains. The ongoing capital expenditure cycle in India and the Middle East, coupled with the company’s strategic initiatives, positions L&T well for sustained growth.
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