Why L&T Stock is Falling?

Reading Time: 7 minutes


L&T Stock Analysis & Future Prospects

Introduction

Larsen & Toubro (L&T) stock has fallen almost 15% from its recent high of Rs.1,009 to Rs.850 in last 1 month. What happened? Why L&T stock is falling? In this article, we have discussed the key reasons for the downtrend in L&T stock and also future prospects of the company.

Stock O Meter
Stock O Meter – A Complete Equity Research Tool by Invest Yadnya

Why Larsen & Toubro (L&T) Stock is Falling?

India’s major Construction, Engineering, Manufacturing and Technology conglomerate – Larsen & Toubro (L&T) Ltd declined almost 15% in last 1 month due to a number of Macroeconomic risks. Lets see why the stock is falling?

Larsen & Toubro (L&T) Share Price Trend

Let us see L&T Share price trend YTD (since January 1, 2020).

L&T Share Price Trend
Larsen & Toubro Ltd – Share Price Trend YTD
  • From the above share price trend, we can see that L&T stock was at Rs.1,371 on January 30, 2020, when the markets were at all-time highs. Then the stock had reported a steep fall in March’20 and declined to its 52-week low at Rs.708 on March 24, 2020.
  • In line with the market recovery, L&T share recovered and reached to the recent high of Rs.1,009 on August 19, 2020.
  • However, in last 1 month, the stock has fallen almost 15% from its recent high of Rs.1,009 to Rs.850 as on September 24, 2020.
  • What happened? Why L&T stock is falling? Let us take a look at the reasons for this decline in the share price.

Reasons behind the Recent Fall in L&T Stock

Why L&T Stock is Falling?
Why L&T Stock is Falling?
1. Overall Market Fall
  • The recent fall in L&T stock is in line with the overall Market Corrections from its recent highs.
  • India’s key benchmark Index – Nifty has corrected almost 7%-8% from the 11,600 level.
  • Thus, on account of the current downturn in overall market, there is a higher selling pressure across Large caps and Blue-chip Stocks.
2. Passive Investors Selling
  • Foreign Institutional Investors (FII) mostly invest  in Indian Markets via Passive Investing.
  • Index Investing a major strategy used in Passive Investing. Since, through the Passive Investing, FIIs Invest in India’s Major Benchmarks/Indices like Sensex & Nifty.
  • L&T is having significant weightage in Sensex : 3% and Nifty : 2.35%, on account of its high free-float market capitalization.
  • So, in Passive Investors’ selling, there is high selling pressure built for major Index Stocks like L&T.
3. Overall Sluggishness in Private Investment
  • We have understood the selling pressure through passive investing. But, why are Active Investors selling L&T stock then?
  • The key reason is the drastic slowdown of Private Investment in Infrastructure sector.
  • This dampened near-term outlook of private investments can have negative impact on L&T stock performance ahead.
Also Read on FinMedium:  Tata Sons' current Market Value
4. High Fiscal Deficit may delay Government Spending
  • In case of dampened Private Spending, Government Spendings ie. Government Capital Expenditure (Capex) come into the force to upbeat that stagnant mood.
  • But, the Finances to meet Spending Requirements is a big challenge to the Government. Thus, the Government is having Spending Pressure. This likely government capital expenditure (Capex) cut appear challenging for the company.
  • The current high Fiscal Deficit can build financing constraints over the Government Spending.
  • Also, the Tax & Non-tax Revenue is falling short in Financing Government’s Spending programme.
    • In the shortage of revenue inflow, how can Government finance its Capex programme?
    • If Government increase borrowing from overseas, India’s Fiscal Deficit can swell even more. And the economy may get caught in this vicious cycle.
  • Thus, for now, the planned Infrastructure Spending may get delayed.
5. Gap between Planning & Execution of Government Projects
  • Government has increased its Infrastructure Spending Target for 2020-25 to Rs.111 Lakh Cr. So, Government’s big Capex budget for Infrastructure projects is very positive sign for the Infrastructure Sector.
  • Thus, the Government is increasing the Portfolio of Infrastructure Projects like Railways, Roads, Highways to :
    1. Boost Economic Growth and
    2. Job Creation
  • However, in spite of such a high Capex target of Rs.111 Lakh Cr, there is a considerably wide gap between the planning and the execution of these proposed infrastructure projects.
  • It is because the financing for the Execution of Planned Projects is a key challenge for the Government currently.
  • Thus, the big gap in Planning-Execution of Infra projects is a big challenge for infrastructure sector and unfavorable for L&T, since majority of the L&T Projects come from Government.
6. Delay in Payments from Government Side
  • There is strong Project Pipeline with L&T for capable of  managing cashflows for next 4-5 years.
  • The company is having no problem with the current in-hand Projects, however, the main problem is the Execution of these Projects.
  • Being a strong group, L&T can spend funds for Execution, but difficulties in on-time Payments from Government-side can affect company.
  • And because of the Delay in Payments from Government side, Private Investment from L&T-side is also going slow.
7. Labour Shortage & Rise in Labour Cost
  • Labour Shortage
    • Amid recent Reverse Migration on the back of COVID-19 pandemic, not all 100% labour force re-joined (came-back % of labours is around 60-70%).
    • Thus, the shortage of labour will have negative impact on overall Labour Market. While, Infrastructure sector is a Labour-intensive sector. Being an Infrastructure conglomerate, L&T is facing the labour shortage problems.
  • Rise in Labour Cost
    • On account of the shortage of Labour post the recent Reverse Migration, the Existing Labour Cost will be increased.
    • Moreover, the infusion of added Labour-force will further raise the Labour Cost. As a result. the overall operating cost will rise and will hamper Operating Profit Margins.
    • Consequently, the declined Operating Profit Margins will have a negative impact on Company’s Profitability.
Also Read on FinMedium:  3 Questions to ask before buying a second home
8. L&T Finance Holding under Pressure
  • The L&T Group is majorly engaged in core, high impact sectors of the economy.
  • L&T is having well-performing IT Subsidiaries like Larsen & Toubro Infotech (LTI), L&T Technology Services, Mindtree etc.
  • But, the Financial arm of the company – L&T Finance Holding is a Pain Point for L&T, with the current troubles in the NBFC Business.
  • L&T leads in nearly every sphere of business it operates in, however, the company is not able to succeed in Finance Services Business.
  • In Addition, L&T is trying to Sell its Asset Management Business ie. L&T Mutual Fund, which is not a positive sign for company.

Larsen & Toubro Ltd – Key Positives

  • Larsen & Toubro (L&T) has completed the strategic divestment of its Electrical & Automation (L&T E&A) business to Schneider Electric. Schneider Electric a global player in energy management and automation.
  • It is a all-cash deal valued at Rs.14,000 Cr and one of L&T’s biggest divestment so far in value terms.
  • L&T’s exit from the E&A business is part of the strategic portfolio review process. Commenting on the closure of this divestment, L&T group chairman Mr. AM Naik mentioned :
    • The closure of divestment of the E&A business is a key milestone in our stated long-term strategy.
    • The challenge was to carve out a business of this scale, with minimum disruption to the sprawling customer base and do it all amid the constraints of a pandemic.
  • From this divestment, the post-tax cash inflow to L&T would be around USD 1.4 Billion (around Rs.10,000 Cr).
  • The company, so far has not shared any concrete plan for the cash proceeds, however there are some positive outcomings :
    1. To Strengthen the Balance sheet :
      • This all-cash deal will help L&T create a much stronger balance sheet and rise in company’s reserves.
      • These high reserves in current challenging outlook of COVID-led slowdown would create a great long-term value opportunities for L&T by focusing on key aspects of business.
    2. Or the Company can propose a Special Dividend of Rs.60-70 per share to its Existing Shareholders.
Also Read on FinMedium:  How to Open a PPF Account Online

Future Prospects of L&T

  • L&T sees prospects in the areas of Government buildings, Data centres, Healthcare Infra, Airports, Metro railways, Hydro projects, Expressways as well as onshore and offshore Hydrocarbon projects.
  • However, this future prospects of Government’s projects is uncertain of the timelines when these projects will take off.
  • Key Determining Factors likely to impact the order intake outlook :
    1. Dependence on large orders given their size
    2. Subdued Private Sector Capital Expenditure (capex)
    3. Short-term to Medium-term spending constraints on State and Central Governments
  • It is expected that both state and central governments will soon start focusing on investment towards infrastructure building and job creation. This can likely ramp-up order intake from the overall public sector.
  • However, L&T’s high base and its dependence on large infrastructure projects can limit near-term growth in order intake.
  • The current COVID-19 pandemic and its fallout make it difficult to forecast the future with any degree of certainty.
  • In FY2019-20 Annual Report of L&T, the group chairman Mr. AM Naik mentioned that : “The Company is hopeful that the second half, H2:FY2020-21 will indicate the better economic and business activity in terms of tendering, good liquidity and revival of labour and supply chains”.



Source link

Disclaimer: The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of the FinMedium or its members. The presentation of material therein does not imply the expression of any opinion whatsoever on the part of the FinMedium concerning the legal status of any company, country, area, or territory or of its authorities. For more info. please read our ToU & Privacy Policy here. If you have any concerns regarding this post, please reach out to us at finmedium@gmail.com

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!


Invest Yadnya

Invest Yadnya

Yadnya Investment Academy focuses on Investor Education, Personal Finance, Money Ideas, Mutual Funds, Stock Market, Investing, and Savings.
Please Share Now :)