Morningstar's equity analyst Piyush Jain has given Larsen and Toubro, or L&T a ‘no moat’ rating. At Morningstar, we classify moats as either wide, narrow, or none.
He bases his stance on the fact that the company derives more than 75% of its revenue from its engineering and construction business, which is a highly competitive and fragmented industry. L&T is usually pitted against rival domestic and international bidders for new projects. The imperative to bid aggressively in a competitive environment means attractive rates of return are precarious, and can be decidedly elusive. Over the last 5 years, despite operating margins reaching consistently in the double digits, L&T’s return on invested capital, or ROIC, has trailed its cost of capital. That, in a gist, is his reasoning behind no economic moat. However, he does concede that even without an economic moat, L&T is still poised for robust growth both at home and abroad.
An economic moat is a long-term competitive advantage that allows a company to earn oversized profits over time. Quite simply, companies with a wide moat will create value for themselves and their shareholders over the long haul. To get a grip on moats, read How we use moats in equity analysis.
Currently, the stock is trading at Rs 984 levels, which is at a discount to the fair value that Jain has estimated at Rs 1,073 per share. To understand more about this, read How Fair Value & Target Price differ.
To read the complete analysis on L&T, click here.