Kotak Sec recommends: buy L & T

Inflows strain to meet target; capital raising in subsidiaries eases pressures.
Moderate inflows of Rs284 bn in 1HFY11 (power leads while O&G, infra lag) imply
strong inflow requirement of Rs470-490 bn (versus Rs416 bn last year excluding the
Hyderabad metro order of about Rs100 bn) in 2H11E to meet full-year guidance.
In-house projects contributed to about 23% of total inflows in 1H.Capital raising in
subsidiaries is a positive as it aids growth visibility and reduces funding pressure on
parent’s balance sheet. Retain ADD.


Inflows barely on target; 20%+ in-house projects; power leads, O&G and infra lag
L&T has announced relatively moderate inflows of Rs284 bn in 1HFY11 (Rs156 bn reported in 1Q
+ Rs128 bn announced in 2Q). The inflows were led by the power segment while orders from oil &
gas and infra segment lagged estimates. L&T’s own in-house projects (Rajupura power project,
Krishnagiri-Walahjapet road project) constituted 23% of the total inflows. Even including the
potential large order of Rs100 bn for the Hyderabad Metro, L&T would still require strong order
inflows of Rs470-490 bn (versus Rs417 bn reported last year) in order to meet its full-year inflow
guidance of Rs870-890 bn. Historical skew towards 2H may help but target still remains stiff.
Subsidiaries IPO likely value accretive as capital aids growth and reduces pressure on parent
L&T recently announced its intention to monetize its stake in L&T Finance Holdings (the holding
company for its two key finance subsidiaries – L&T Finance Ltd and L&T Infrastructure Finance Ltd)
through an IPO to raise about Rs15 bn. This would help ease the pressure on the parent’s balance
sheet. Both these subsidiaries recorded very strong performance in FY2010 with a 39% yoy
growth in asset base of L&T Finance and an 85% growth for L&T Infra Finance.
IDPL next in line for IPO; invested Rs12 bn in infra assets; may need Rs15 bn p.a. for next few years
L&T has 18 infrastructure projects (seven complete) in its portfolio spread across the roads, ports and
rail with a cumulative project size of about Rs320 bn. The company has currently invested equity of
about Rs12.4 bn in these projects and is likely to require additional equity of about Rs40-45 bn over
the next three years. These projects are likely to be eventually routed through L&T IDPL—likely next in
line for monetization. This may take a while as the company may wait for revenue generation.
Retain estimates; reiterate ADD with a revised target price of Rs2,150/share
Retain earnings estimates of Rs63.9 and Rs78.2 for the standalone and Rs74.7 and Rs90 for the
consolidated entity for FY2011E and FY2012E, respectively. Reiterate ADD with a revised TP of
Rs2,150 (from Rs2,075) on (1) likely strong execution pick-up in 2HFY11E and FY2012E, (2) likely
capex revival, (3) scale-up of power business, and (4) value accretion in subsidiaries