L&T cut to underperform by BofA as growth slows, upside seen limited

Investing.com -- BofA Securities has downgraded Larsen & Toubro Ltd. (L&T) to “underperform” from “buy,” citing limited upside after a year of consistent outperformance. 

The brokerage maintained its price objective at 3,700 Indian rupees, just below the company’s current market price of 3,730 rupees, and said, “With key positives now behind & no scope for further valuation expansion, in our view, we downgrade L&T to U/P with unchanged PO.” 

The analysts noted that L&T had been the only buy-rated stock in their industrial coverage when the sector was downgraded in August 2024, supported by strong order inflows, earnings visibility and reasonable valuations. 

Over the past year, the company delivered “significant beats on order inflow /earnings, outperforming our coverage,” and its stock rallied 10% in the past two months, leaving valuations “at fair levels,” the brokerage said.

A key portfolio change came with the Telangana government’s decision to acquire Hyderabad Metro Phase I from L&T. 

The state will purchase the company’s equity for 20 billion rupees and assume 125 billion rupees in debt. 

While BofA valued the asset at 70 billion rupees, it said the exit of the loss-making project was “EPS & RoE accretive: we upgrade our FY26-28 earnings estimates by 3-4%.” 

Hyderabad Metro, which began operations in 2017 under a 60-year concession, had reduced L&T’s consolidated profits by 4% in FY25 with a 6.5 billion rupees loss. 

Analysts estimated the transaction would improve returns by up to 25 basis points as the low-yielding asset exits the balance sheet.

Even with the earnings upgrade, BofA sees challenges ahead. Domestic capital expenditure growth is projected to slow from 20% between FY21-24 to 11% over FY25-27. 

The brokerage added, “We argue India’s capex growth would slow materially from 20% CAGR in FY21-24 to 11% over FY25-27E & disappoint consensus expectations of govt. capex led revival on low FY25 base (impacted by elections). ” 

It also flagged risks in the Middle East, where L&T’s order inflows and revenues have grown at 36% and 31% CAGR since FY20, raising the region’s share of the company’s order book from 14% in FY20 to 37% in FY25. 

With Brent crude prices under pressure, BofA said subdued energy markets could dampen spending, noting that “lower crude is a risk for order inflow.”

On estimates, BofA projects L&T’s adjusted net income to rise from 145,623 million rupees in FY25 to 266,320 million rupees in FY28, with earnings per share increasing from 105.93 rupees to 193.73 rupees over the same period. 

The price-to-earnings ratio is forecast to decline from 35.21x in FY25 to 19.25x in FY28, while dividend yield is expected to edge up from 0.91% to 1.20%. Return on equity is estimated at 17.3% in FY26, improving to 18.9% by FY28.

The brokerage added that despite strong earnings visibility and an 18% CAGR in EPS through FY28, “valuation expansion from here on seems difficult” as most positive triggers are already reflected in the stock price.