Stock views on RELIANCE COMMUNICATIONS, LARSEN & TOUBRO

LARSEN & TOUBRO


Merrill Lynch raises the price target of Larsen & Toubro to Rs 2,000 from Rs 1,715 on a hike in EPS by 4-5% led by surprise in inflows and re-rating of E&C (engineering and construction) to 19x (18x) on improving visibility. An EPS CAGR of 27% (FY10-12E) and creation of growth vehicles in power equipment, naval shipyard, railways, nuke and aerospace domains and infra concession wins support of a `Buy' rating. It is led by an improving visibility of orders from roads, oil and gas, and infra space like urban infra, high-rise buildings, railways, etc. Merrill Lynch thinks L&T should be able to meet its 25% Y-o-Y inflow guidance on a high base. Improved inflows from Q3FY10 should support sales growth at 20% Y-o-Y as delayed projects get grounded following improved funding (especially of own roads). Management highlighted buy out of minority PE investors to consolidate ownership at L&T IDPL (infrastructure development) arm.

RELIANCE COMMUNICATIONS


HSBC upgrades the rating of Reliance Communications to `Neutral' with a target price of Rs 158. The target price is based on PE of 10x on 12-month forward earnings estimate. Under the research model, for stocks with a volatility indicator, the `Neutral' band is 10 ppt above and below the hurdle rate for India stocks of 10.5%, or 0.5-20.5% around the share price. While keeping the target price unchanged, the ratings upgrade is driven by the recent stock price correction. HSBC recognizes that RCOM could benefit from 3G services, given its CDMA capabilities and fibre backhaul, but it is too early to give much credit to this opportunity, and this an upside risk. Data cards on the CDMA platform may enable RCOM to achieve higher-than-estimated ARPU (average revenue per user), and higher-than-estimated elasticity as a further upside risk. In HSBC's view, improved disclosure would be positive and address investor concerns. Downside risks include non-availability of 2G spectrum in the next six to nine months and execution risks around 3G.