L&T shares: Where is this underperforming Nifty stock headed ahead of Lok Sabha elections?

Larsen & Toubro Ltd (L&T) are down 5.5 per cent in the last one month against a 4.16 per cent rise in the benchmark Nifty. In the last three Lok Sabha election years i.e. 2019, 2014 and 2009, the L&T stock has cumulatively jumped by an average of 52 per cent in the months of March, April and May. The returns stood at 20 per cent in 2019, 36 per cent in 2014 and 100 per cent in 2009, JM Financial said in a technical note.

The Election Commission of India (ECI) is expected to announce the date for the Lok Sabha Elections 2024 after March 9.

"In comparison to NSE200 weight, mutual funds are underweight on the stock. The ratio of Larsen & Toubro over Nifty is trading at the upper trend-line support drawn from the previous channel breakout as observed during the period September 2023," Neeraj Agarwal, Technical & Alternative Research at JM Financial said

In the last few sessions, the L&T stock has declined from a high of Rs 3,734 level to a low of Rs 3,263 level. It managed to close above its 8-day EMA this past Friday on back of higher than average traded volumes and delivery volumes, Agarwal said. On the F&O side, cumulative futures open interest registered a high of 15.8 million shares as against 10.4 million shares observed on the day of inception, he said.

"Last Friday, it declined to 15.3 million shares suggesting short coverings. With open interest still on the higher side, further short coverings cannot be ruled out. Technically, all major selling in the stock in the last 1.5 years has ended at its 100-day EMA, which is currently placed at Rs 3,250 level. With the recent lows already been tested near its 100-day EMA, we expect limited downsides in the stock," he said while suggesting a long on L&T and short on Nifty. Agarwal suggested a L&T-Nifty ratio target of 0.16 level from 0.05 level, with a stop loss below 0.1438 level on a closing basis.

On the fundamental side, L&T’s domestic revenue and order inflow have remained subdued during M9FY24 and the company sees the risk of an election-related slowdown impact on execution and inflows for Q4FY24 and Q1FY25, LKP Securities said. However, an increased share of international orderbook implies a reduced impact of the domestic slowdown, the brokearge noted.

The L&T stock has an average target price of Rs 3,193 as per publicly available data with Trendlyne. This suggests a 17 per cent potential upside on the counter.

L&T management commentary

At Day 1 of Kotak Institutional Equities' Chasing Growth 2024, L&T noted that while 75 per cent of its business is from India, the improvement in net working capital as percentage of sales to 16 per cent from 22 per cent has been from the improvement in the company’s balance sheet with the government of India ramping up its expenditure 75 per cent in last 4 years, and partly from the immense growth the company has seen as a surprise from its overseas operations where it has received significant advances towards the projects.

"The focus is to achieve a margin of 9.5 per cent, with competitive intensity growing on the domestic front. LT

speaks of achieving towards a margin of 9.5% where it bids with a 10.5 per cent margin for the projects, with 1 per cent acting as cushion towards margin of safety in case of contingencies, for last 3 years. Every contract in EPC business is bound to have margin of safety where 80 per cent of time things go haywire, where the company doesn’t have a lot of flexibility to take things under control," it noted.

Kotak said while the company spoke of improvement its profitability, this is expected to be aided partly through its divestment in Hyderabad metro and Nabha power assets. The Hyderabad metro is expected to take at least 2.5 yrs more for monetisation, with a requirement more capex happening for increasing the ridership through more coaches and there by increase in frequency of the trains.

"While, Nabha Power has space to expand capacity for another unit, the company is looking for an able player to divest its business at an attractive price point," it said.

Also read: Stock recommendations by analysts for Feb 20: GMR Infra, Indiabulls Real Estate, BLS Intl

Also read: Zee shares snap 3-day fall, jump 7% today; here's a likely reason why