Larsen and Toubro

Credit Suisse upgrades the rating on L&T to `Outperform’ with a revised target price of Rs 1,970. At a macro level, Credit Suisse expects supply/capacity growth to outstrip demand growth as the recovery sets in in ‘10. Clear and worsening general supply constraints have necessitated this change. Investor portfolios should again favour companies that benefit from the supply side acceleration. L&T is ideally positioned in this regard. Earnings estimates for L&T move up over 35% in FY11 and another 25% in FY12, led by the return of short cycle orders. Further, a strong macro will increase the order momentum and news flow on potential orders.

Over the past six months, L&T’s stock has tracked the Sensex, despite expectations of strong order inflows, as a weak order macro in H2FY09 impacted H1 earnings growth and broad industrial capex remained weak. Credit Suisse expects these factors to turn positive, ensuring outperformance of the stock in ‘10, irrespective of the market direction; however, absolute returns will depend on market moves given that the stock is not particularly cheap on near-term valuations.