L&T, Power Grid, NTPC: Re-rating Prospects - Jefferies Analysis

Over the past year, major players in the capital goods/industrials and utilities sectors such as Larsen & Toubro (L&T), NTPC and Power Grid have witnessed 68-93% increases in their share prices. The increase in these companies share prices can be explained by the country's strong economic growth and the consistent increase in the power demand. As the economy grows, industries expand, which in turn drives up the need for electricity. This higher demand for power translates into increased business for companies involved in providing infrastructure and services related to power generation and distribution leading to a boost in their share prices.

L&T's Re-rating Potential

Jefferies India Pvt Ltd analysts foresee further upside potential for L&T citing strong re rating prospects. Despite trading at a 70% premium to the Nifty index, L&T historically traded at a 90% premium. Jefferies predicts an 11% further re-rating for L&T from its current levels emphasizing the importance of core margin delivery for this potential. Alongside L&T, Jefferies highlights Siemens, Thermax, ABB, and KEI as top picks in the industrials sector.

Siemens and ABB India Ltd have recorded increases in their share prices up to 79% over the past year. However, according to Jefferies, Siemens is currently trading at a premium of 185% compared to the Nifty index slightly lower than the 187% premium observed during the period from April 2006 to April 2008. This indicates limited potential for further growth, as per Jefferies analysis.

Similarly, ABB is trading at a premium of 216% higher than the average premium of 123% observed during the April 2006 to April 2008 period. After selling its power grids section in 2018–2019, ABB has undergone changes in its business model. It now focuses solely on automation with some exposure to robotics.

Re-rating Potential for NTPC and Power Grid

NTPC and Power Grid have witnessed substantial increases in their share prices ranging from 84% to 163% over the last two years surpassing the Nifty's 40% rise. Since these companies operate in regulated industries Jefferies evaluates them based on their Price to Book value. According to Jefferies analysis comparing the premium and discount to the Nifty Price to Book NTPC and Power Grid could potentially rerate by 17% and 32% respectively from their current prices. However, it's important to note that Power Grid's past cycle average has limited historical data relative to NTPC, as highlighted by Jefferies.

To Summarize

Larsen & Toubro, NTPC and Power Grid stand out as strong contenders in their respective sectors benefiting from favorable economic conditions and rising power demand. While L&T presents further re-rating opportunities investors should consider the evolving dynamics and historical performances of these companies to make informed decisions. Jefferies' insights provide valuable guidance for navigating the current market landscape and identifying promising investment opportunities.