03 Dec , 2021 By : monika singh
Mumbai: Capital goods and engineering major Larsen & Toubro is on a rerating path especially with capital expenditure showing recovery trends, said Jefferies.
The brokerage, which has maintained a buy rating on the stock with a target price of Rs 2,405, said an ESG or Environmental, Social and Governance rating upgrade would be a 'sweetener'. The target price implies an upside of 34% from current levels.
On Thursday the stock ended up 0.35% at Rs 1,792.20.
In a note released on Wednesday, Jefferies said L&T management's discussions are on with ESG rating agencies on the defence exposure of the company.
The management reiterated that the company does not manufacture any explosives or ammunition of any kind, said Jefferies. ESG rating agencies have raised concerns as L&T is associated with work on India's nuclear submarine Arihant and Pinaka missiles.
"Reducing debt, creating shareholder value through dividends, and reducing cash calls outside the core are meaningful re-rating triggers ahead for L&T," said Jefferies.
The brokerage said an uptick in private sector capital expenditure and the company's recent foray into the online education space could potentially create value in the medium term.
While Jefferies sees the stock rising to Rs 2,405 in its base case scenario assumption, it sees the stock at Rs 2,800 in an upside scenario of early recovery in the macro investment cycle. In the downside scenario where domestic order flow does not materialise and there is a higher-than-expected margin contraction, Jefferies sees the stock falling to Rs 1,500.
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