After falling nearly 5 per cent on the Budget day and 3.4 per cent a day before, India's capex bellwether Larsen & Toubro Ltd (L&T) soared 5 per cent on Tuesday to top Sensex's gainers. Anlaysts noted the recent fall was unjustified, as L&T has limited presence in roads, rail and defence -- 2.5 per cent of order inflows over FY21-24, and, thus, the likely slowdown may not impact it much.
Priyankar Biswas, analyst for India Industrials, Logistics and Metals at BNP Paribas India said L&T is perceived as a bellwether for capex and, thus, the weak headline capex number unsurprisingly led to a sharp stock-price drop on February 1. But L&T has limited exposure to the the segments seeing less-than-expected capex outlay, he said.
"L&T has a market share of 15-20 per cent in power T&D and 22-25 per cent in metro rail, where capex is on an uptick. The focus on increasing healthcare infra spends is also a positive. We have highlighted that while the capex shift will happen, it will favour L&T," Biswas said.
L&T shares settled the day at Rs 3,443.60 on BSE, up 4.76 per cent. The BNP Paribas analyst has set a target price of Rs 4,605 on L&T.
He expects Indian infrastructure investments to remain elevated in the near-to-long term, driven by government investments, especially in power transmission, generation (thermal and renewables), defence, transport infra (roads, railways, and metro) and water sectors.
"We expect L&T to be a key beneficiary of these investments and estimate tendering prospects of Rs 22 lakh crore and order inflows of over Rs 3.3 lakh crore by FY27. We are positive on the stock, led by strong order inflow prospects and potential Ebitda margin recovery. Furthermore, its exit from development assets such as Nabha Powand Hyderabad Metro should push L&T's ROE above its target of over 18 per cent by FY26 (against 14.8 per cent in FY24)," the BNP Paribas India analyst said.
Among other infra stocks, BNP Paribas said volume guidance for AIA Engineering has weakened significantly on near-term cyclical headwinds. Thus, despite the recent share-price correction, the risk reward balance is still not favourable. "Thus, we maintain a cautious stance and await better volume visibility to turn positive," it said while suggesting a target of Rs 4,105.
On Cummins India Ltd, the brokerage has 'Underperform' on the stock with a target of Rs 3,200. The stock is a play on diesel engine demand for powergen as well as industrial applications. "We expect the company to deliver similar revenue growth in the near term as it did over FY19-24. However, we expect Ebitda margin expansion to slowdown as margin improvement levers have played out. Despite the similarity in growth prospects, KKC has re-rated ahead of its peers in the Indian capital goods sector, which we see as unjustified," it said.