L&T shares have delivered 60% returns in 2023 on the back of robust order book, margin expansion, and buyback tailwinds. Analysts foresee the infra major’s outperformance extending into 2024 based on sustained public capex momentum.
Analysis for Layman
- L&T – Leading Indian infrastructure & engineering conglomerate
- Nifty 50 – Key stock market index comprising largest 50 firms
- Capex – Capital expenditure or investments by companies
- PE – Price to earnings ratio, a valuation metric
L&T is considered a barometer of India’s infrastructure build-out. Its order pipeline remains strong at Rs 8.8 lakh crore driven by government focus on roads, water, energy projects etc. Earlier commodity cost pressures easing have helped shore up margins. Potential continuity in public spending after elections spikes growth visibility. Hence stock can witness rerating with P/E multiples expanding further.
L&T crossing the historic milestone of 60% annual returns offers validation of the infrastructure supercycle unfolding in India. The ordering frenzy from central government and PSUs diverting massive resources towards asset creation has filled the company’s coffers with a bulging order book spanning years. Even the transient headwinds of input cost inflation could only dent margins temporarily rather than materially impair project viability. The promise of continuity in policy prioritization of infra buildout across transport, power, healthcare, and defense further reinforces earnings potential. This has triggered significant PE multiple expansions with the market betting on extended growth runways. However, concerns on balance sheet stress may resurface if private capex fails to revive in tandem and working capital cycles remain elongated. Execution capability at scale also faces efficiency challenges as talent stretch emerges while maintaining profitability benchmarks. But near term momentum remains unquestionably strong.
Impact for Retail Investors
For retail investors, L&T’s scorching stock price ascent offers a template that quality compounders can reward substantially over long horizons. The infra theme’s strength negates necessity to time entries or anticipate squiggles in interim performance. However, portfolio allocations need rationalization at current valuations with eyes on red flags like concentration buildup or leverage reliance. Prospective investors should evaluate whether indices like Nifty Infra already provide sufficient infra exposure matching their risk appetite before buying L&T outright. For existing shareholders, balancing tactical partial profits to fund other equally promising stories like railway modernization allows managing euphoria.
Impact on Industries
- Infrastructure – Capex acceleration with guaranteed order flows assures revenue visibility
- Cement, Steel – Volume surge as construction activity peaks to complete projects
- Banking – Credit growth impetus as infrastructure financing needs balloon
- Energy – Solar, transmission projects aid renewable capacity expansion
Long Term Benefits and Negatives
- Employment generation as infrastructure projects involve extensive manpower
- Economic multiplier effect as new roads, power sources energize further investments
- Debt lock-in given long gestation periods constraining fiscal flexibility
- Environmental sustainability concerns with massive construction activity
Short Term Benefits and Negatives
- Revenue, profitability uptick for L&T boosting investor sentiment
- Infrastructure value chain benefits from demand trickle down
- Rising interest rates putting pressure on viability of some projects
- Execution delays or cost overruns can affect long term orders
Companies to Gain
- KEC International – Power transmission projects beneficiary
- UltraTech Cement – Construction demand boosts volumes
- L&T Technology – Engineering services leverage parent strengths
- NBCC – Execution capabilities may constrain order book clearances
- Punj Lloyd – Financial stress poses growth hurdles
L&T’s towering stock returns bear proof of focused managerial vision transforming cyclical upturns into structural growth stories for long horizon investors by riding mega trends early.
Citation: Periwal, Nikita. “L&T Riding Infra Wave Likely to Extend its Record Run into 2024.” The Economic Times