Larsen & Toubro :: Bear and bull case scenarios; Target: Rs2,100:: JPMorgan

L&T has underperformed the market by 15% last month and is down
to its  52-week  low. At  16x FY12E earnings (vs low  of  10.7x  - Feb-09
and high of 26x - Sep-09), we explore the bull and bear case scenarios.
Given our view that overseas orders could be a joker in the pack, we
think  market  concern  on  headline  order  flows  could  be  exaggerated.
However,  the  bear-case  is  that  multiples  might  converge  towards  its
regional peers, following the change in geographical mix of orders.
 Investors  are  most  concerned with L&T’s  order  flows  this  year. In
the  past  9  out  of  10  years,  L&T’s  relative  performance  has  shown
positive response to order flow growth. Mgt has been guiding to 15-20%
growth in orderflows for FY12 (i.e.Rs917-Rs957B). Recently, L&T lost
large  power  plant  equipment  orders  to  stiff  competition  from  Doosan
and BGR. L&T could have budgeted at least Rs50B wins from here, in
our  view. Besides this  prominent  order loss, there  have  been  anecdotal
instances  of  L&T  losing  orders  in  domestic  hydrocarbons,  metals  and
nuclear power construction over the past 6 months.
 Over  the  past  6  months,  amidst  rampant  fears  of  domestic  capex
disappointment,  a  renewed  thrust  for  export  order  wins  is
discernible. In Jun-q, overseas inflows rose sharply to 16% of total. The
Sep-q  marks  a  quantum  shift  in  the  proportion:  L&T  has  reported
Rs82bn of order inflows of which as much as Rs51B was from overseas.
 What is the stock pricing in? That is the 20Bn$ question. The Mkt cap to
order  flow  ratio  is  0.86x based  on  Rs917B  of  FY12E,  vs  the  last  2  year
average of 1.2x and previous trough of 0.54x (Feb-09). From  this, it appears
an 18-20% decline is already being priced in by the market. However, from
our  conversations  with  investors,  it  seems  a  decline  of  10%  is  widely
expected. Currently, we think the markets are getting more bearish on order
flows than needed,  given the M-E upside which might be bigger than most
believe. The devil’s advocate, of course, would say that the stock should be
de-rated on the back of this, and that remains a risk to our call.

Gems Status

October 1, 2011:  

Reliance

Following an intra-week low at Rs 748 on Monday, the stock bounced back and finished the week with almost 5 per cent in gains. The stock has an immediate resistance at Rs 835 and next at Rs 850. An inability to surpass the first resistance will be a cue for initiating fresh short positions with stiff stop-loss. Downward targets are Rs 786 and Rs 770.

As long as the stock trades below Rs 850, its near-term outlook remains gloomy. Fresh long positions are recommended only if the stock moves emphatically beyond Rs 850. It can then rally to Rs 880 or Rs 900 in the months ahead. However, the medium-term trend continues to be down for the stock. A strong close above Rs 900 is required to reverse this trend and take it higher. Medium-term key supports are at Rs 750 and Rs 713.

State Bank of India (Rs 1,911.1)

The volatility in the stock continued last week as well and it retreated 2 per cent. However, it persists to test its long-term significant support at around Rs 1,900 with negative bias. Traders with a short-term perspective can hold their short positions with stop-loss at Rs 1,955 levels. Downward targets are Rs 1,850 and Rs 1,800. Near-term resistance is at Rs 2,010 and subsequently at Rs 2,080.

The stock has to conclusively climb over Rs 2,080 to signal that its short-term trend is turning positive. The next key resistance is at Rs 2,150. The medium-term trend is down for the stock since its April peak of Rs 2,959 levels. A strong weekly close above Rs 2,500 is needed to indicate that its medium-term trend has turned positive. On the other hand, in the medium-term, a decisive drop below Rs 1,800 can drag the stock lower to Rs 1,726 or Rs 1,708.

Tata Steel (Rs 415.2)

In line with our expectations, the stock declined last week and plunged 4 per cent. The short-term trend is down and the forecast is also down. The stock is trading well below its 21- and 50-day moving averages. Daily as well as weekly indicators are featuring in the bearish zone. Traders can consider holding their short positions with stop-loss at Rs 432. Targets are at Rs 410, Rs 400 and Rs 390. A failure to decline below Rs 400 will be sign for taking profits off the table. Resistances for the week are at Rs 440, Rs 460 and Rs 475.

The stock appears to have resumed its medium-term downtrend that has been in place ever since its April peak of Rs 641. A decisive breach of Rs 400 can pull the stock down to Rs 369 in the medium-term.

Infosys (Rs 2,533.8)

Last week, the stock penetrated its key resistance at Rs 2,400 which it had been testing from September 15. It has zoomed 8 per cent with good weekly volumes. The short-term trend is turning positive. As long as the stock trades above Rs 2,445, its near-term stance stays positive and the stock can rally to Rs 2,620 and Rs 2,690 in the forthcoming weeks. However, fall below Rs 2,445 will pull the stock down to Rs 2,400 and Rs 2,350. Next important support is at Rs 2,200.

Medium-term trend, though, is still down for the stock. Only a strong move above Rs 2,700 will change the trend.