The Hindu Business Line : Larsen & Toubro: Buy

INVESTMENTS can be considered in the Larsen & Toubro (L&T) stock from a medium-to-long term perspective. Any decline linked to the broad market can, especially, be used to take exposure in the stock.

This represents a shift in Business Line's view on the stock. Business Line had recommended partial profit-booking at about Rs 300 two months back.

The change in view is based on renewed strength in the engineering sector and the re-rating of cement stocks over the past couple of months. Prices of pure cement plays such as Gujarat Ambuja Cement, Madras Cement and Shree Cement have notched up gains of about 30 per cent.

Importance of re-rating: This is of importance to L&T shareholders. If the demerger process and the open offer by Grasim for a 30 per cent stake in the new cement company (CemCo) get completed over the next six months, there is the possibility of the CemCo stock trading at a much higher price level than what appeared likely two-three months back, or even when the deal was sewed up, six months ago.

However, Business Line's view that the swap ratio for the eventual merger of CemCo with Grasim's cement and viscose staple fibre businesses would be tilted in favour of the latter, remains unaltered. But the cement sector re-rating has opened up the possibility of L&T shareholders getting a higher value by tendering to the open offer and selling a part of their shares in the secondary market.

However, this enhanced value has not been priced in as buying interest in the L&T stock is driven by its powerful presence in the engineering and construction business space.

Pure play value: The engineering business has been the driver of earnings growth even as the growing cement business, which was in the red for the most part of the past decade, provided cash flows.

As the manpower gets downsized by a few thousands, following the demerger, the profitability of the engineering business will get reflected on the per share earnings in a more pronounced manner.

When L&T acquires the hue of a pure engineering business, a re-rating cannot be ruled out as it may attract investors who are holding back, waiting for the umbilical cord with the cement business to be severed.

The price of the L&T stock has shown a firm trend in recent months. But it is the pure engineering plays such as ABB, BHEL, Thermax and Alfa Laval, to name a few, that have held the centrestage as market fancy for this sector continues.

Impressive order book: L&T has moved aggressively to scale up its order book, which is now about 35 per cent higher than a year ago.

This growth is significant, as it has come at a time when newer MNC players have enhanced competition levels in the engineering and construction business.

L&T is set to make a transition to being a company with a lower shareholder fund base following the demerger of its cement business.

During such a phase, the sizeable increase in its order book provides a cushion against any slackening of revenue growth.