Sharekhan by BNP Paribas has a buy call on Larsen Toubro with a target price of Rs 1,655.The current market price of Larsen Toubro is Rs 1,375.10.Time period given by the brokerage is one year when Larsen Toubro price can reach the defined target.
Investment rationale by the brokerage-Cash rich balance sheet: LTs cash including investments on its consolidated balance sheet at the end of Q3FY19 stands at approximately Rs 23,900 crore with standalone D/E ratio of 0.4x and the company generates close to Rs 5,000 crore of free cash flows every year.
The company would have to shell out Rs 10,733 crores for 66.7 per cent stake acquisition in Mindtree.
Moreover, LT is also looking at exiting some non-core businesses that could bring in close to Rs 18,000-20,000 crore.
Thus, the acquisition will not put any stress on the books of LT.Acquisition is not EPS or RoE dilutive: LT generated a little over 5 per cent yield on its current investments, cash cash equivalents during the first nine months of FY2019.
As per our rough calculations, the acquisition will not have any material impact on the earnings estimates of LT for FY2020 and FY2021.
(Refer to the table below).
Also, the deployment of free cash in a business with relatively higher return ratios would not adversely impact LTs return ratios on a consolidated basis.Valuation - retain buy: The company is likely to meet its order inflow guidance of 12 per cent for FY2019 and considering several orders inflow towards end of quarter as well as unannounced order inflows.
The management is also expected to achieve its topline guidance of 12-15 per cent YoY growth for FY2019.
LT is the best play on the domestic capex cycle recovery and managements focus on the strategic plan of achieving profitable growth and superior capital allocation augur well for earnings to report a 17 per cent CAGR over FY2018-FY2021E.
Notwithstanding the near term challenges related to unwarranted resistance by the management of Mindtree, we see the acquisition as a positive move by LT and retain our Buy rating on the stock with target price of Rs 1,655.