Worsening State Finances Keeps JPMorgan Cautious On L&T
L&T’s high exposure to state government agencies may derail the 12% projected revenue growth for FY18.
Risks associated with order inflow and execution may weigh on Larsen and Toubro Ltd. (L&T) in the near term, warned global brokerage firm JPMorgan in a recent report, while retaining its overweight rating on the stock.
L&T’s high exposure to state government agencies and, in turn, worsening state finances may derail the 12 percent revenue growth that the company had projected for the financial year 2017-18, the brokerage said.
Deteriorating state finances, and the multitude of prospective risks from the Pay Commission to farm loan waivers, should be seen not just as weakening public finances but – by pushing up borrowing costs for the private sector – also potentially delaying the private investment cycle.Sumit Kishore, Analyst, JPMorgan India
Indian state government agencies accounted for around 30-35 percent of the order disclosures by L&T over the last 2 years.
While the share of India’s private sector in the order backlog fell sharply to about 20 percent in FY17 from 45-50 percent between FY08 and FY13, JPMorgan does not expect further improvement in the near term.
The brokerage also remains cautious on risks to domestic revenue growth and a slowdown in the pace of urban infrastructure contract awards.
Our 20 percent domestic infrastructure segment revenue growth estimate for FY18e may be at risk if a deterioration in state finances impacts execution of state orders more than expected.JPMorgan Report
JPMorgan expects a 13 percent earnings per share growth in FY18 and an 11 percent growth in the subsequent financial year. Cash generation and deleveraging will continue through FY19 led by earnings growth, easing working capital pressure, and waning capex commitments, it said in the report, adding that any asset sales across non-core businesses and developmental projects could also unlock cash for shareholders.
The brokerage retained its overweight rating on the engineering conglomerate from a 1-2 year horizon and has a price target of Rs 1,952 per share, indicating a 10 percent upside potential.