After several days of panic following the terrorist attacks
on USA and the subsequent war threats in Afghanistan, the stock markets
are slowly recovering from the depths to which they had sunk. In the week
ending September 28th the Sensex closed at 2812 which was far better than
the 2594 level at the beginning of the week
The sentiments in the immediate previous week were propped up by the
removal of sanctions from the US Government which perhaps has made
it possible for more international funds to flow into investments in India.
The Government also showed some urgency in compensating for the failure
of the AI disinvestments by identifying 13 more disinvestment candidates
including Maruti and VSNL. 50 more FDI proposals amounting to US $ 16.5
million were also cleared by the Commerce Ministry.
Even though the first quarter GDP growth at 4.4 % was nothing much to
write about, against a much bleaker expectations, the growth rate appeared
to be satisfactory. More than the economic developments within the country,
the surprising drop of the International oil prices and the hope that it
will remain low for some more time has removed one of the main reasons
for the recent down fall.
While it is still difficult to say which way the sentiments will turn
if the war breaks out, it is now reasonably certain that the Indian economy
will be able to meet the challenge more than adequately. This has made
the stock markets look positive at the end of the week.
The change in the Circuit breaker system effective from October 1st
may be helpful in accelerating the upward march for the time being. The
new system will activate the circuit breaker for the market based on the
rise or fall of the Sensex. The trigger levels are at a fairly high level
and therefore the circuit breakers are not expected to be operational frequently.
However for investors who need to still hold a conservative line of
thinking, it is better to park their funds in companies who have no uncertainties
regarding their sales growth in the coming year. One such company is
L & T which has a healthy order back log that reasonably ensures that
there will not be any fall in turnover in the next year. The E&C division
of the Company which contributes 60 % of the revenue of the Company
is itself reported to have an order backlog of a whopping Rs10,020 crore.
The Cement division contributes an additional 26 % and is also a significant
factor in the profitability of the Company’s operations. The share price
of L&T has in the recent days moved up and down with the rumors on
the de-merger of the Cement division. The markets appear to have a favourable
view of the de-merger and expect the stock prices to firm up after
de-merger. The delay in completing the process is weighing down the share.
The de-merger and a possible enrolment of a foreign partner for the de-merged
Cement division is expected to release some cash for the other operations
and enhance the shareholder’s value.
In the meantime, the improving trend in Cement prices is expected to
help the Company hold its profit line for the year. If the increased FDI
approvals bring about a renewed activity in the Industrial and Infrastructural
scene, L & T will benefit by its pre-eminent position in the industry.
Some of the new initiatives that L& T has taken are in the software
division where the company is setting up a dedicated an offshore development
center for Samsung India software operations at Bangalore, focused on telecom-related
software. In the times to come, this division can play a crucial role in
the profitability of the Company.
During the quarter ending June 2001, the Company achieved a turnover
of Rs 1830 crores as against 1663 crores in the corresponding period last
year. The profit after tax jumped up from Rs 18.8 crores to Rs 73 crores
in the same period. The EPS on an annualized basis was around Rs 12.
The strength of L & T is in its strong professional management,
which has the capacity to sail with the business uncertainties and come
out stronger whenever a challenge is thrown. The current price of the share
at RS 160 after a deep dip in the last one-month reflects the downtrend
of the Indian economy and its effect on an infrastructure player such as
L & T. With the uptrend in the economy expected in the next year or
so, the Company may be able to recover its original charm and re-emerge
as a premier stock for conservative investors. It is a good time for acquiring
the shares with a medium term perspective.
Na.Vijayashankar
September 29, 2001
