Larsen and Toubro, a company that exists in the heavy engineering space, is currently trading at a price to earning multiple of ~69. Management claims that in the foreseeable future, they hope to grow at a rate of 30-35% both in their topline and their bottomline.

Considering that in India, where you can place your money in a risk free FD and earn 9% interest on it for a PE multiple of 11 - a company that is not growing at all should have a PE multiple of ~8-9.

For LnT to get to that PE multiple, it needs to increase its bottomline by about 8 times. Giving them the benefits of improving economy of scale, and a higher profit margin based on increasing complexity of what they do, let assume that they need to increase their topline by 6 times to increase their bottom line by 8 times. [I admit, I am pulling numbers out of thin air here, but these numbers appear reasonable to me].

Also assuming that management was understating growth potential, lets assume that LnT grows at a rate of 40% CAGR in both topline and bottomline.

To grow their topline 6 times, they will need:~
5.5 years.

Why should investors pay today for growth that is years into the future ? Is Larsen such a sure bet ? In these 5 years, India may see political instability, China and the US may see a slowdown in their economies and any number of unforseen things may happen.

Here are my reasons for not being optimistic on this scrips price:~

Neither can LnT PE be rerated from existing high level..
Neither can LnT earnings outpace their valuations..
Neither are we at a stock market trough so we would see extraordinary gains in future.

Isnt the risk reward ratio a bit skewed here ? I am willing to bet that money placed in an FD would yield more to investors than investing in LnT at this time, with the benefit of being risk free.

I would like to hear from people who are bullish on LnT.. Am I missing something in this (admittedly back of the envelope) analysis..

Reasons for L&T's premium valuations:

Market leadership:

Larsen and Toubro is a great business and the "replacement cost" of this business will be high. It is not easy to create a company with size, expertise and reputation that L&T has achieved. Investors will always pay a premium to own this business.

Good growth:

FY 2007 earnings grew by 33% over FY 2006 earnings.
FY 2008 expected earnings growth = 40%.
FY 2009 expected earnings growth = 33%.

FY 2008 eps is expected to be around Rs 68 and FY 2009 eps is expected to be around Rs 90.

At current price of Rs 4175, the stock is trading at 46 times FY 2009 earnings.

FY 2008 is almost over and 6-7 months from now people will start looking beyond FY 2009.

Strong earnings visibility:

The company has an order book of 45000+ crore - two times the expected FY 2008 sales.

The company has much greater earnings visibility compared to many other companies in the market.

This is one reason why L&T gets a premium valuation - one doesn't have to worry about its business for next few quarters and maybe years.

===========================================

No doubt, the stock is currently expensive.

If one assumes 30% earnings growth in FY 2010, eps for FY 2010 will be around Rs 117.

A fair price for such a company will be 30-35 times forward earnings.

(By fair, I mean a price which is neither cheap nor expensive).

30 times Rs 117 = Rs 3510.
35 times Rs 117 = Rs 4095

Thus, 9 months from now, when the market starts discounting FY 2010 earnings, I would give L&T a fair price of Rs 3510 - Rs 4095, which is actually lower than current price of Rs 4175.

This is a bull market and I am not sure a stock can trade at a price lower than fair value in such a market. .

Compared to overvaluation in many other stocks, L&T's overvaluation is not disturbing.

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alchemist,

thanks for responding.. I see your point that LnT deserves premium valuations because of its orderbook, market leader status and results so far. And also that LnT is not as overvalued as some of its peers, this being a bull market.

Having said that, how to determine the right exit points in these blue chips..

I do accept that Lnt is the best in its class. But it is no more attractive. coz Even if the company is so good what if it is expensive and the return on stock is lesser compared to it's peers. I feel that JP associates and GVK Power is very attractive and a lot of value is left in both the stocks.

Alchemist, as you said Lnt is already priced till 2010 but these companies has a lot left if it has be be some whr even 3/4th of LnT.

JP Associates as per its 2006-2007 earnings the P/E is only 20 times the EPS but currently even JPa has near to order book of more than 50K crores including Ganga Expressway project. Apart from that JPa holds 60% in its Hydro subsidary and 60% in its JP Power(Yet to be listed).

GVK has got Slum revamp in association with HDIL and the Mumbai airport Biz. They have got lot of power projects across the country which is yet to be commisioned.

Jai Prakash Associates had a consolidate net profit of Rs 553 crore in FY 2007.

http://www.jilindia.com/financialres...07_audited.pdf

The company currently has around 100 crore shares outstanding and a market value of Rs 50000 crore.

The actual PE ratio of Jai Prakash Associates is around 100..

The data that you have checked is incorrect.

The stock underwent 5 for 1 split on December 17th 2007. I guess the eps data that you are using is before the split happened.

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All of which begs the question:~

How to determine when to exit ? Is there a nice quantitative metric one can follow ? A thumb-rule ?

How do members decide its time to take profits and some of the original cash off the table ?

Thanks
Sudeep

In a bull market, as long as you think, the price justifies earnings of next 2-3 years, then it is ok to hold the stock.

If a stock has factored in next 2-3 years of earnings, it may be worth holding.

However, the same stock may not be worth a fresh buy. For a fresh buy, I would prefer a stock whose price can be justified by at most the next 18 months' earnings.

In bull markets, stocks may remain slightly over-valued for a long time. Hence if there is visibility of earnings like in case of capital goods or infrastructure stocks, then no harm in holding.

I will not hold a stock, if I have to consider earnings of beyond 3 years to justify the price.

Do take a look at the threads on PE ratio and PEG ratio.

Wait till tomorrow, I am writing a post on 1999-2000 bull market. It may answer your question. .

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What do you mean when you say that a stock has already accounted for 2-3 years of future earning ? Can you explain a bit more how you take this into account ?

Thanks in advance :-)
Sudeep

Till yesterday, Nifty (4899) has lost 23% from its high of 6357.

Larsen & Toubro (Rs 3665) has lost 22% from its high of 4690.

L&T has out-performed majority of the stocks in the markets by a large margin.

Earnings visibility (strong order book) takes out a lot of risk from this stock.

Thus, it did not feel the selling pressure that many other stocks were witnessing.

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Alchemist, What do you think about l&t now ?

Let me clarify a bit about today's developments.

Hedging is common for manufacturing companies and booking hedging losses is not always a negative.

It only means the price of raw materials (or any other underlying asset) moved in favor of the company.

The reduced cost of raw materials will make up for losses in the hedged position.

Once a position is fully hedged, you will either have losses in the hedged position or the underlying asset.

========================================

The losses may be significant if the hedged position is bigger than the requirement for the underlying.

e.g.

A company needs 100 kg sugar.

It buys 200 kg sugar futures.

Now if sugar prices go down, the company will have more losses in the hedged position, than benefits from the underlying asset (100 kg sugar that it will buy).

========================================

Larsen and Toubro's management is confident about its position and believes that improvement in margins will compensate for the hedging losses.

I will take their word for it.

I do not see today's development as much of a negative.

========================================

However, few brokerage houses have cut FY 2009 and FY 2010 eps estimates.

May be the estimates were over-optimistic in the first place.

As market sentiment is negative, I expect L&T to drift down further.

Larsen and Toubro is still is a good long term investment and can be bought near support levels of 2400-2410 and 1850-1860.

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Hello Guys,
I am relatively new entrant to stocks. It would be really useful if you experienced guys help me initially and I will be forever thanking you for your help.
Can you please let me know your views on (Short Term and Long Term) on Larsen and Toubro and general idea about Capital Goods Sector?

All the replies in this thread are at least a month old. Can someone present his/her views for the CMP of L & T and future prospects... Short Term and Long Term?

Seniors, please help me out with your views on CMP of L&T?

I am planning some investment in this stock and your views will be extremely helpful... (If Dear Alchemistji can find some time for this, nothing like it)

Also, can someone tell me when L&T will be declaring their 4th quarter results?

It seems all the senior members are too busy with queries from novices like I. I once again request you guys to post your fresh view on L & T. The stock has already increased by 300 since I asked question for the first time and time is slipping by...
Dear Alchemistji... please let me know your views on L & T.

Thanks ahead to you guys

If you want advice for the long term (2-3 years), L&T is a good story.

If you want to know whether L&T will outperform any other investment, sorry, can't say...

If you want to know whether L&T will give positive returns in the next 1, 2, 3, 4 months etc., sorry, can't say...

If you want a good entry price, again can't say...

What I did since Jan 21, 2008 was to buy 2 or 3 shares each time L&T "crashed" and I had the cash.

I think even if you don't get a bargain price buy 1 or 2 whenever you can keeping in mind the sectoral composition of your portfolio and individual stock weightages.

Actually, I am a bit confused about the eps of Larsen and Toubro.

Different sites are giving different figures.

I was waiting for the Q4 provisional figures, but I think the company is directly going to declare the final audited figures.

The stock is a bit expensive, but still remains a good long term bet.

Wait 1 or 2 days more, I will surely post about it.

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Thank you very much vasa1 for your advice. I will start accumulating 1 or 2 at every opportunity...
Thank you Alchemistji... I will eagerly wait for your next update...

Actually I was wondering since this stock was instrumental in taking the markets to new highs... and then it has crashed by almost 40% since then. After that though the market has recovered quite well, L&T has not shown the same bounce back.

I will wait for your comments sir.

Thank you once again.

Dear Friend

L&T is a stock that you hold for a long term to reap adequate benefits .If you start buying L&T as a monthly SIP ( Systematic Investment Plan ) over the next 12 months then you will have less to worry about the down side . Once you accumulate it for a year , keep quiet and lock that investment for the next 3-5 years and see it unfolding its value and giving you positive returns .The same applies to BHEL .

Alchemistji, your reply is still awaited eagerly . Meanwhile I have made an entry in this script at 2880.
Kindly post your views.

Thanks a ton...

I have attached the monthly chart for Larsen and Toubro.

If you consider the entire rally from 71 to 4670, the 50% retracement and 61.8% retracement are at 2370 and 1830.

I expect markets to go down further from these levels and I don't expect Larsen and Toubro to buck the trend.

I think 2400 and 1850 would be good levels to average out.

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Thank you so much sir... What will we do without you?
I will surely average out if these levels are tested.

Hopefully, such times shall not arise.

Thanks again Alchemistji... Just one question which popped up in my mind as I was studying technical charting... is where do you get this historical price and volume data to prepare these charts?
I mean you have plotted L&T right from 71 to 4670 and down now, where can I find this data for other stocks?

I use Metastock for charting and Viratech for data, but there are many free charting tools available.

See this thread on tools for technical analysis.

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http://www.indiainfoline.com/news/in...Id=67809&lmn=1

L&T has sold their Ready Mix Concrete business to Lafarge. Earlier there was also news that L&T is creating various verticals in their businesses and want to list them separately. L&T Infotech to be the first in this category.

Does such developments are favourable for this script in future? Any idea what is the time scale for this developments and finally any news on L&T's 4th quarter results?

Thanks already.

As far as hiving-off businesses to subsidiaries is concerned, it is usually considered a positive by the markets, as it is seen as "value unlocking"

However, investors must remember that "value unlocking" is not "value creation" and there is no fundamental change in the company's business if some units are demerged into separate companies.

If you divide one apple into two, you won't get two apples.

Q4 results won't be announced. The company will directly announce results for the entire FY 2008 - most probably in June.

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Hi Alchemist,
When Lafarge sees it, as an opportunity in that business, then why should L&T getting out it? In which way does it positive for L&T? (except one time selling profit)
Pls comment.

Lafarge has a lot of expertise in cement, concrete etc. It makes much more sense of Lafarge to run these concrete plants than L&T.

L&T's stratergy has been to avoid commodity-type businesses and focus more on its core strengths - engineering and construction.

Some time back, Larsen and Toubro has sold-off its cement business to Aditya Birla Group.

Now, the concrete business has also been sold-off.

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You have posted critical supports for this stock. Can you also post resistance levels for this stock please? In the past one week, have seen this stock struggle to close above 3K though it has crossed it many times.

Today also L&T struggled to close above 3K. Can someone please post the critical resistance level for this stock?

The stock is facing resistance from the 50 day EMA and 200 day EMA.

50 day EMA is the green ribbon.
200 day EMA is the red ribbon.

The stock has closed today at the 50 day EMA.

The 200 day EMA is at 3084.

This will prove to be a strong resistance.

Next resistance would be around 3367.......38.2% retracement of the stock's fall from 4690 to 2551.

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hi alchemist,

can u please put some light on the bonus issued to L&T shares i.e. 1:1 at 17 / shares. I have bought it 2 days before at 2700. will i be getting the bonus if i kept it? Also, when it will be showing in the account?

Pramod

1:1 is the bonus ratio and Rs. 17 is the dividend per share. Both are pending formal approval of shareholders. So quite some time will pass before you'll get the bonus shares and dividend.

You will have to keep the shares till the "record date" to get the bonus and dividend.

It will take a few weeks.

(I think the dividend per share has been announced as Rs 15 per share).

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Can I buy Larsen and Toubro now and get eligible for bonus and dividends..?

Is it a good idea to buy this script at this time.

I am a long term investor.

Thanks.

To Protocol... Yes you can buy and keep these shares for getting bonus as record date is still far away. They have to first get shareholders approval for bonus issues through postal ballot.

Anyways... can I request senior members to post recent chart of Larsen & Toubro... I do not have any software to plot it but I am following it's daily movement and get the feeling that it is heading for breakout in some direction. Will try to find some direction from the chart (I am not so great at reading charts though but will like to try my hand with whatever I have learned through this forum)...

Would be great if you can also post your observations of the chart.

Capital goods sector is going through a re-rating and correction. Yes I was the one who was very bullish for them in 2007. My mistake!

All the Financial houses have re rated this sector with down targets!

If You look at charts, Capital good is currently beginning its corrections and I expect it to last for next 7 months and followed by consolidation period. L&T is no different

Buying a share just because it got bonus or Split is not a good reason. This will mean more liquidity nothing else, which means more supply of shares in short term.

I don't think any thing fundamentally changes with Bonus or Split. Also with current market and economy scenario one should be careful with where you are putting your money!

CHART


- 50 EMA(Red line) signifying medium term trend is trending down(Direction) nicely.
- You can see how price retraced back to 50 EMA, 2 times.
- Also note how price was in a trading range between Nov and January before the big fall.
- Price is also consolidating now between April and June, note the blue lines. ADX is also weak near 20 .

The point here is to look for consolidation period(Trading range) and then take your decisions based on breakout direction from other indicators.

A trading range might form or there is more fall expected in coming days!

Plotted the chart from free site
http://www.icharts.in/charts.html

- Saved it as a picture, opened it in PAINT and drew my line, wrote etc etc.
- I also learnt it with Icharts and Paint.
- yes it doesn't gives you point by point accuracy, but you can see the direction and form a view nicely.

I think there are more chances for L&T to go down further based on the volume and price action. When the stock is going up you should see large volume but in this case it is lacking. i am learner and not an expert.

See post 30 in this thread.

Larsen and Toubro wasn't able to cross the 200 day EMA and came down.

The stock has again rallied, but is still below its critical resistance levels
- 50 day EMA (green ribbon)
- 200 day EMA (red ribbon)

I still believe that market has more downside and we can see 14250 on the Sensex in coming weeks.

If Sensex goes down, most stocks will also go down with it.

Here is your chart:



For technical analysis software, check out these threads:

Free Technical Analysis Software - Chart Nexus

Tools for Technical Analysis

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hi,

I have bought 8 LnT at 2293/-, is it good at this price? Will i be getting Bonus shares? When is the record date?

Thanx & brgds

You will get the bonus.

Just a observation: First you bought it then you are checking here if it was a good buy?