Larsen & Toubro up 4% after sinking 11% in 7 wks; Jefferies maintains 'Buy

Larsen & Toubro (L&T) shares rallied 4 percent to Rs 914.70 on BSE in intra-day trade on Friday after global brokerage Jefferies maintained a 'buy' rating on the stock with a SOTP price target of Rs 1,280 per share. L&T has underperformed the market by dropping 11.5 percent in the past seven weeks, compared to a 6 percent increase in the S&P BSE Sensex. An early turnaround in the macro investment cycle should see a sharp pick-up in the order flow and valuations of the firm, analysts at Jefferies said. In the event of a stronger margin order movement, the Middle East (ME) margin contraction factored-in does not come through. "The hydrocarbon and heavy engineering segment of L&T should continue to see margin trends improving. Although the increased share of domestic execution assisted by orders picked up in the last 2 years provides margin comfort," the brokerage company said in the stock update. Meanwhile, Reserve Bank of India ( RBI) Governor Shaktikanta Das said today that due to disruptions caused by the Covid-19 pandemic that has hit economic activities, the Indian economy will contract 9.5 percent in fiscal 2020-21. The index of manufacturing purchasing managers (PMI) for September 2020 rose to 56.8, its highest mark since January 2012, backed by new orders and production acceleration. The PMI services for September remained in contraction at 49.8 but increased from 41.8 in August. These expectations are also reflected in our growth forecasts, which suggest that GDP growth may break out of contraction On the other hand, Emkay Global Financial Services expects L&T to record a 3.2 percent decrease in revenues in the July-September quarter (Q2FY21) as the execution was affected by labor shortages, norms of social distancing, and indecisive customer deferral. "We expect a relatively lower effect on the sector of its services, which should offset the decrease in sales. Margins and working capital are also likely to deteriorate due to lower usage of resources and difficulty in collecting receivables. The reported order inflows for Q2FY21 are around Rs 175 billion and during Q2 we estimate Rs 27,000 crore of total order inflows, including service revenues."