UBS: L&T: Power business: strong growth driver

Power business: strong growth driver
􀂄 Fast-tracking indigenization of BTG equipment is a positive
In our recent meeting, the company highlighted that the indigenization of BTG
equipment manufacturing is on the fast track. L&T had earlier planned to
indigenize boilers in three years and turbines in four years; now it believes this
could be possible a year ahead of the target date. We think the power business will
emerge as a significant growth/value driver in the medium term and we are
positive on the outlook for this business.
􀂄 Expect BTG margins to be better than EPC margins post localization
The order inflow momentum in the power business is strong; current order backlog
is around Rs250bn (6,600MW boilers and 8,200MW turbines). Margins in the first
few sets will be low due to the high import content. However, post indigenization,
margins are likely to increase substantially to levels higher than the current EPC
business margins (12-13%). We believe L&T may achieve 15% margin at the
steady stage of production (FY14/15).
􀂄 Likely levy of duty on foreign power equipment
Newsflow about the government levying duty on imported power equipment has
become stronger and it is likely in our view. This would be a positive for domestic
manufacturers and L&T will be a key beneficiary, in our view. Please refer to our
note, India Industrials: Duty on foreign power equipment?, published 17 August
2010.
􀂄 Valuation: Buy rating with SOTP-based price target of Rs2,150
In our view, L&T is the best play on Indian infrastructure and we expect valuation
multiples to remain buoyant.