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Strong execution boosts profit growth above estimates but weak inflows prompt earnings downgrade: In
3QFY11, L&T reported revenue of Rs113b (up 40% YoY), significantly above our estimate of Rs96b (up 20% YoY).
Net profit (adjusted for capital gains and provision reversals) was Rs8b (up 32% YoY), above our estimate of Rs7.9b
(up 30% YoY). We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively and PAT estimates
by 4% and 10% respectively due to lower order intake in FY11 and FY12. Our intake assumptions are Rs748b
(Rs891b earlier) (up 7.5% YoY) for FY11 and Rs921b (up 24% YoY) for FY12. We expect consolidated EPS of Rs90
(up 21% YoY) in FY12 and Rs107 (up 19% YoY) in FY13.
FY11 order intake guidance at 25% looks stretched; power accounts for 43% of intake in 9mFY11: Order
intake was Rs133b (down 25% YoY), and the 3QFY11 order book was Rs1,148b (up 26% YoY) with book-to-bill ratio
of 2.7x TTM revenues. The management's initial guidance of FY11 order intake growth of 25% hinges on 4QFY11
intake growth of 57% on a large base of Rs238b achieved in 4QFY10. This guidance was based on large projects like
the Hyderabad Metro (Rs120b) and road projects worth Rs20b to be ordered by the end of FY11, which seems
unlikely. Price-driven competition in the hydrocarbon segment and slow rate of ordering in the power and infrastructure
segments led to a fall in intake growth in 3QFY11.
E&C EBITDA margins down 154bp YoY due to a rise in commodity prices (fixed price contracts are ~40% of
the order book): In 3QFY11 E&C EBITDA margin decreased 155bp YoY to 11.5% mainly due to a rise in commodity
prices, particularly of steel. The management stated that fixed contracts account for ~40% of the order book,
resulting in lower margins due to lack of pass through benefits.
Valuation and view: We expect L&T to report revenue and PAT CAGR of 23% and 20% respectively over FY11-13.
Our consolidated EPS is Rs90 (up 21% YoY) for FY12 and Rs107 (up 19% YoY) for FY13. We expect EBITDA
margins of 12.3% in FY12 (down 50bp YoY) and 12.5% in FY13 (up 20bp YoY). We value L&T on an SOTP basis with
a price target of Rs1,919 and have a Buy rating on the stock. We ascribe a P/E multiple of 22x FY12E for L&T
standalone (Rs1,553/share) and Rs387/share for L&T's other subsidiaries.
Profit growth above estimates on strong execution, weak inflows prompt
earnings downgrade, maintain Buy
In 3QFY11, L&T reported revenue of Rs113b (up 40% YoY), significantly above our
estimates of Rs96b (up 20% YoY).
3QFY11 EBITDA margins were 11.5%, down 154bp YoY, as material costs climbed
636bp YoY.
Net profit (adjusted for capital gains and provision reversals) were Rs8b (up 32%
YoY), above our estimates of Rs7.9b (up 30% YoY).
Order backlog was Rs1,148b (up 26% YoY ) with a BTB ratio at 2.7x TTM. Order
intake of Rs133b was down 25% YoY. In 9mFY11 intake was Rs495b, up 8% YoY
against FY11 intake guidance of 25% YoY. This implies 4QFY11 intake growth of
57% to achieve the guidance of 25% growth in FY11, which remains highly challenging
given the higher base of 4QFY10.
We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively
and our PAT estimates by 4% and 10% respectively due to lower order intake in FY11
and FY12. Our FY11 intake assumptions are Rs748b (Rs891b earlier) (up 7.5%) and
Rs921b (up 24%) for FY12. Our FY12 consolidated EPS expectation is Rs90 (up
21%) and Rs107 (up 19%) in FY13. Our EBITDA margins are 12.3% for FY12
(down 50bp) and 12.5% for FY13 (up 20bp). We have reduced our target price to
Rs1,919 (Rs2,356 earlier) on an SOTP basis by reducing the target multiple for L&T
standalone to 22x FY12E (25x FY12E earlier). We believe the lower P/E multiple
factors in lower PAT CAGR of 19% over FY11-13 against 24% earlier as growth in
intake declines and execution timelines increase going forward. Maintain Buy.
Execution strong in 3QFY11, revenues surge 40% YoY
The pace of execution gathered momentum after the lows of 1QFY11 (up 6.5% YoY)
with E&C revenues growing by 40% in 3QFY11and 22% YoY in 9mFY11. Strong growth
in 3QFY11 was due to long gestation of key power projects beginning to contribute to
revenue growth as they cross critical threshold limits (50% for large projects).
E&C EBITDA margins down 154bp YoY due to a rise in commodity prices
(fixed price contracts are ~40% of the order book)
In 3QFY11 E&C EBITDA margins decreased 155bp YoY to 11.5% mainly due to a
rise in commodity prices, particularly of steel. The management stated that fixed
contracts now accounted for ~40% of the order book, resulting in lower margins due
to the lack of pass through benefits. The sudden rise in commodity prices has put
pressure on margins related to incremental order flow as stated by the management
during the conference call.
EBG and MIP EBITDA margins were down 126bp and 102bp YoY at 11.8% and
20.1% respectively due to lower realizations on exports due to price driven competition
and a rise in prices of copper, silver and other commodities.
Given L&T's policy, according to which margins are accounted for after 50% of a
project completion (when execution is less than 24 months) and after 25% for other
projects, we see significant contribution of power orders in the revenue booking process
going forward. We expect FY12 EBITDA margins of 12.3% (down 50bp YoY) and of
12.5% for FY13 (up 20bp YoY).
MIP/EBG face margin pressure
In 3QFY11, EBG and MIP revenues grew 11% and 15% YoY respectively. EBG's
revenue growth was led by a pick up in industrial and agricultural valves and MIP's
growth was led by engineering service income from overseas projects.
EBITDA margins for EBG and MIP were down 126bp (11.8% YoY) and 102bp (20.1%
YoY) respectively mainly due to sharp spike in input costs of silver and copper, a drop
in exports and price-driven competition in EBG. In MIP it was due to lower realizations
and lower fixed cost absorption.
FY11 order intake guidance of 25% looks stretched; power accounts for
43% of 9mFY11 intake
The 3QFY11 order book was Rs1,148b (up 26% YoY) and book-to-bill ratio was 2.7x
TTM revenue. The management's initial guidance of FY11 revenue growth of 25%
hinges on 4QFY11 intake growth of 57% on a high base of Rs238b achieved in
4QFY10. The guidance was based on certain large projects like the Hyderabad Metro
(Rs120b) and road projects worth Rs20b being ordered by the end of FY11, which
seems unlikely.
The share of power orders, which was 20% in 2QFY09 and 33% in 1QFY11, was
43% of the overall backlog of Rs1,148b in 3QFY11.
In 3QFY11 order intake was Rs133b (down 25% YoY), including in-house projects,
worth Rs18b. In house projects contribute 14% of the order book against 7% at the
end of FY10. The decline in order intake in 3QFY11 was due to increased pricedriven
competition in the hydrocarbon segment (price differential of 20% between L1
and L2) leading to L&T losing out on many orders in the segment. Postponement of
many orders in the power, urban infrastructure and roads segments due to an uncertain
political environment (scams, stalled Parliament) and project-specific delays like lack
of environment clearance certification and coal block linkages.
Power BTG/BoP orders amounted to Rs300b, comprising 26% of the order backlog.
Power orders accounted for 43% of the intake in 9mFY11 compared with to 37% in
FY10. They also accounted for 37% of the order backlog against 30% in FY10.
Yield on cash balances 7.8%, NWC 10.5% of trailing revenue
Other income in 3QFY11 was Rs2.5b (up 6% YoY), comprising largely interest income
Rs940b (up 291% YoY), dividends from subsidiaries/associates Rs450m and miscellaneous
income Rs640m. In 3QFY11 L&T booked Rs353m as extraordinary income due to the
sale of stake in its subsidiaries and associates.
The overall yields on cash balance were 7.8% in 3QFY11 against 4.3% in 3QFY10
and 12% in 2QFY11. The average cost of debt was 7.8%. This trend resulted in
negative carry of 130bp in 3QFY11. Only 2QFY11 experienced a positive carry of
200bp as the quarter contained a higher amount booked from sale of investments.
3QFY11 working capital was up by 6% YoY and investments rose 13% YoY. Overall
FY11 capex stands at Rs11b as most of L&T's forays into areas such as shipbuilding
and forging are progressing on track.
Investments in subsidiaries and associates stands at Rs100b.
L&T Infotech profit improves, finance subsidiaries perform well
In 3QFY11, L&T Infotech reported a 3% QoQ improvement in revenues and PAT
improved by 33% QoQ.
In 3QFY11 L&T Finance reported 54% growth in revenue and PAT doubled YoY.
L&T Infra Finance posted a 43% jump in revenue and a 72% growth in PAT.
Conference call takeaways
The management sounded cautious about achieving inflows worth Rs350b in 4QFY11
to meet FY11 inflows of Rs850b as many projects in the power, infrastructure and
hydrocarbons sectors are facing delays due to non-receipt of clearances and will
spill into FY12.
Segments like hydrocarbons are facing competitive pricing to the extent that the
pricing differential between L1 and L2 is 20% and hence led to L&T losing out on
orders.
The Hyderabad Metro order valued at about Rs120b, which will be awarded to
L&T on a BOT basis, faces the task of achieving financial closure by March FY11.
The company suspects its EPC order to be pushed to the next year.
Many bulk ordering packages in various segments are being broken down into multiple
packages with smaller order values and limited scope of work, which is leading to
delays in order awards.
The management is confident of achieving 25% YoY revenue growth in FY11. We
model revenue growth of 22% in FY11 implying 18% growth in 4QFY11 revenue.
EBITDA margins for future orders are under pressure as 40% of orders are on a
fixed-price basis and face the pressure of high raw material costs.
The total project cost of the BOT projects is Rs600b and EPC orders in segments
like urban infrastructure, hydroelectric power and the metro rail are pending to be
awarded to L&T E&C.
L&T commissioned a BTG plant in 3QFY11. It has capacity of 4GW and forays
into shipping and forging are on track.
Valuation and view
We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively and
PAT estimates by 4% and 10% respectively due to lower order intake in FY11 and FY12.
Our intake assumptions are Rs748b (Rs891b earlier) (up 7.5% YoY) for FY11 and Rs921b
(up 24% YoY) for FY12. Our consolidated EPS is Rs90 (up 21% YoY) for FY12 and
Rs107 (up 19% YoY) for FY13. We expect EBITDA margins of 12.3% for FY12 (down
50bp YoY) and 12.5% for FY13 (up 20bp YoY). We have reduced our target price to
Rs1,919 (Rs2,356 earlier) on an SOTP basis by reducing the target multiple for L&T
standalone to 22x FY12E (25x FY12 earlier). We believe the lower P/E multiple factors in
lower PAT CAGR of 19% over FY11-13 against 24% earlier as growth in intake declines
and execution timelines increase going forward. Maintain Buy.
Company description
L&T is India’s largest engineering and construction
company. It undertakes projects on engineering,
procurement and commissioning basis. Its business is
categorized in three segments, viz. Engineering and
construction (E&C), Electrical and Electronics (E&E) and
other diversified businesses. It has many subsidiaries and
associate companies which will gradually start adding
robustly to its bottom-line.
Key investment arguments
L&T is best placed with across-the-board presence in
infrastructure segments.
L&T has tied up with GE Hitachi, AECL (Canada) and
Westinghouse for ABWR and PHWR reactor
technology. Nuclear Power in India is likely to attract
investments of Rs1,600b over 8-10 years and ordering
for projects is expected to begin from FY11.
L&T has a presence in financial services (L&T Finance/
Infra Finance) and IT/ITES (L&T Infotech). In the
past 2-3 years, these businesses have attained critical
scale. With L&T's plan to grow the IT/ITES and its
infrastructure finance businesses to 40% of group
revenue by FY14,we see organic and inorganic scaling
up of the two verticals in 2-3 years. L&T is exploring
opportunities to grow inorganically in the IT services
segment.
Key investment concerns
Order intake is driven by long gestation projects and is
unlikely to favorably impact FY11 or FY12 revenues
and margins.
An unfavorable political climate, logjams relating to
clearances for projects stifle fresh order intake growth,
hampering earnings growth.
Recent developments
L&T has been awarded the construction of an airport
terminal building in Oman worth Rs22b.
L&T was awarded a complete BoP package for the
2x 600MW TPS by the Dainik Bhaskar group in
Chhattisgarh, worth Rs15b.
Valuation and view
We estimate L&T to report revenue and PAT CAGR
of 23% and 20% over FY11-13. Our consolidated EPS
is Rs90 (up 21% YoY) for FY12 and Rs107 (up 19%
YoY) for FY13. Our EBITDA margins are 12.3% for
FY12 (down 50bp YoY) and 12.5% for FY13 (up 20bp
YoY). We value L&T on an SOTP basis with a price
target of Rs1,919 and have a Buy rating on the stock.
We ascribe a P/E multiple of 22x FY12E for L&T
standalone (Rs1,553/share) and Rs387/share for L&T's
other subsidiaries.
Sector view
We maintain our positive view on the sector.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong execution boosts profit growth above estimates but weak inflows prompt earnings downgrade: In
3QFY11, L&T reported revenue of Rs113b (up 40% YoY), significantly above our estimate of Rs96b (up 20% YoY).
Net profit (adjusted for capital gains and provision reversals) was Rs8b (up 32% YoY), above our estimate of Rs7.9b
(up 30% YoY). We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively and PAT estimates
by 4% and 10% respectively due to lower order intake in FY11 and FY12. Our intake assumptions are Rs748b
(Rs891b earlier) (up 7.5% YoY) for FY11 and Rs921b (up 24% YoY) for FY12. We expect consolidated EPS of Rs90
(up 21% YoY) in FY12 and Rs107 (up 19% YoY) in FY13.
FY11 order intake guidance at 25% looks stretched; power accounts for 43% of intake in 9mFY11: Order
intake was Rs133b (down 25% YoY), and the 3QFY11 order book was Rs1,148b (up 26% YoY) with book-to-bill ratio
of 2.7x TTM revenues. The management's initial guidance of FY11 order intake growth of 25% hinges on 4QFY11
intake growth of 57% on a large base of Rs238b achieved in 4QFY10. This guidance was based on large projects like
the Hyderabad Metro (Rs120b) and road projects worth Rs20b to be ordered by the end of FY11, which seems
unlikely. Price-driven competition in the hydrocarbon segment and slow rate of ordering in the power and infrastructure
segments led to a fall in intake growth in 3QFY11.
E&C EBITDA margins down 154bp YoY due to a rise in commodity prices (fixed price contracts are ~40% of
the order book): In 3QFY11 E&C EBITDA margin decreased 155bp YoY to 11.5% mainly due to a rise in commodity
prices, particularly of steel. The management stated that fixed contracts account for ~40% of the order book,
resulting in lower margins due to lack of pass through benefits.
Valuation and view: We expect L&T to report revenue and PAT CAGR of 23% and 20% respectively over FY11-13.
Our consolidated EPS is Rs90 (up 21% YoY) for FY12 and Rs107 (up 19% YoY) for FY13. We expect EBITDA
margins of 12.3% in FY12 (down 50bp YoY) and 12.5% in FY13 (up 20bp YoY). We value L&T on an SOTP basis with
a price target of Rs1,919 and have a Buy rating on the stock. We ascribe a P/E multiple of 22x FY12E for L&T
standalone (Rs1,553/share) and Rs387/share for L&T's other subsidiaries.
Profit growth above estimates on strong execution, weak inflows prompt
earnings downgrade, maintain Buy
In 3QFY11, L&T reported revenue of Rs113b (up 40% YoY), significantly above our
estimates of Rs96b (up 20% YoY).
3QFY11 EBITDA margins were 11.5%, down 154bp YoY, as material costs climbed
636bp YoY.
Net profit (adjusted for capital gains and provision reversals) were Rs8b (up 32%
YoY), above our estimates of Rs7.9b (up 30% YoY).
Order backlog was Rs1,148b (up 26% YoY ) with a BTB ratio at 2.7x TTM. Order
intake of Rs133b was down 25% YoY. In 9mFY11 intake was Rs495b, up 8% YoY
against FY11 intake guidance of 25% YoY. This implies 4QFY11 intake growth of
57% to achieve the guidance of 25% growth in FY11, which remains highly challenging
given the higher base of 4QFY10.
We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively
and our PAT estimates by 4% and 10% respectively due to lower order intake in FY11
and FY12. Our FY11 intake assumptions are Rs748b (Rs891b earlier) (up 7.5%) and
Rs921b (up 24%) for FY12. Our FY12 consolidated EPS expectation is Rs90 (up
21%) and Rs107 (up 19%) in FY13. Our EBITDA margins are 12.3% for FY12
(down 50bp) and 12.5% for FY13 (up 20bp). We have reduced our target price to
Rs1,919 (Rs2,356 earlier) on an SOTP basis by reducing the target multiple for L&T
standalone to 22x FY12E (25x FY12E earlier). We believe the lower P/E multiple
factors in lower PAT CAGR of 19% over FY11-13 against 24% earlier as growth in
intake declines and execution timelines increase going forward. Maintain Buy.
Execution strong in 3QFY11, revenues surge 40% YoY
The pace of execution gathered momentum after the lows of 1QFY11 (up 6.5% YoY)
with E&C revenues growing by 40% in 3QFY11and 22% YoY in 9mFY11. Strong growth
in 3QFY11 was due to long gestation of key power projects beginning to contribute to
revenue growth as they cross critical threshold limits (50% for large projects).
E&C EBITDA margins down 154bp YoY due to a rise in commodity prices
(fixed price contracts are ~40% of the order book)
In 3QFY11 E&C EBITDA margins decreased 155bp YoY to 11.5% mainly due to a
rise in commodity prices, particularly of steel. The management stated that fixed
contracts now accounted for ~40% of the order book, resulting in lower margins due
to the lack of pass through benefits. The sudden rise in commodity prices has put
pressure on margins related to incremental order flow as stated by the management
during the conference call.
EBG and MIP EBITDA margins were down 126bp and 102bp YoY at 11.8% and
20.1% respectively due to lower realizations on exports due to price driven competition
and a rise in prices of copper, silver and other commodities.
Given L&T's policy, according to which margins are accounted for after 50% of a
project completion (when execution is less than 24 months) and after 25% for other
projects, we see significant contribution of power orders in the revenue booking process
going forward. We expect FY12 EBITDA margins of 12.3% (down 50bp YoY) and of
12.5% for FY13 (up 20bp YoY).
MIP/EBG face margin pressure
In 3QFY11, EBG and MIP revenues grew 11% and 15% YoY respectively. EBG's
revenue growth was led by a pick up in industrial and agricultural valves and MIP's
growth was led by engineering service income from overseas projects.
EBITDA margins for EBG and MIP were down 126bp (11.8% YoY) and 102bp (20.1%
YoY) respectively mainly due to sharp spike in input costs of silver and copper, a drop
in exports and price-driven competition in EBG. In MIP it was due to lower realizations
and lower fixed cost absorption.
FY11 order intake guidance of 25% looks stretched; power accounts for
43% of 9mFY11 intake
The 3QFY11 order book was Rs1,148b (up 26% YoY) and book-to-bill ratio was 2.7x
TTM revenue. The management's initial guidance of FY11 revenue growth of 25%
hinges on 4QFY11 intake growth of 57% on a high base of Rs238b achieved in
4QFY10. The guidance was based on certain large projects like the Hyderabad Metro
(Rs120b) and road projects worth Rs20b being ordered by the end of FY11, which
seems unlikely.
The share of power orders, which was 20% in 2QFY09 and 33% in 1QFY11, was
43% of the overall backlog of Rs1,148b in 3QFY11.
In 3QFY11 order intake was Rs133b (down 25% YoY), including in-house projects,
worth Rs18b. In house projects contribute 14% of the order book against 7% at the
end of FY10. The decline in order intake in 3QFY11 was due to increased pricedriven
competition in the hydrocarbon segment (price differential of 20% between L1
and L2) leading to L&T losing out on many orders in the segment. Postponement of
many orders in the power, urban infrastructure and roads segments due to an uncertain
political environment (scams, stalled Parliament) and project-specific delays like lack
of environment clearance certification and coal block linkages.
Power BTG/BoP orders amounted to Rs300b, comprising 26% of the order backlog.
Power orders accounted for 43% of the intake in 9mFY11 compared with to 37% in
FY10. They also accounted for 37% of the order backlog against 30% in FY10.
Yield on cash balances 7.8%, NWC 10.5% of trailing revenue
Other income in 3QFY11 was Rs2.5b (up 6% YoY), comprising largely interest income
Rs940b (up 291% YoY), dividends from subsidiaries/associates Rs450m and miscellaneous
income Rs640m. In 3QFY11 L&T booked Rs353m as extraordinary income due to the
sale of stake in its subsidiaries and associates.
The overall yields on cash balance were 7.8% in 3QFY11 against 4.3% in 3QFY10
and 12% in 2QFY11. The average cost of debt was 7.8%. This trend resulted in
negative carry of 130bp in 3QFY11. Only 2QFY11 experienced a positive carry of
200bp as the quarter contained a higher amount booked from sale of investments.
3QFY11 working capital was up by 6% YoY and investments rose 13% YoY. Overall
FY11 capex stands at Rs11b as most of L&T's forays into areas such as shipbuilding
and forging are progressing on track.
Investments in subsidiaries and associates stands at Rs100b.
L&T Infotech profit improves, finance subsidiaries perform well
In 3QFY11, L&T Infotech reported a 3% QoQ improvement in revenues and PAT
improved by 33% QoQ.
In 3QFY11 L&T Finance reported 54% growth in revenue and PAT doubled YoY.
L&T Infra Finance posted a 43% jump in revenue and a 72% growth in PAT.
Conference call takeaways
The management sounded cautious about achieving inflows worth Rs350b in 4QFY11
to meet FY11 inflows of Rs850b as many projects in the power, infrastructure and
hydrocarbons sectors are facing delays due to non-receipt of clearances and will
spill into FY12.
Segments like hydrocarbons are facing competitive pricing to the extent that the
pricing differential between L1 and L2 is 20% and hence led to L&T losing out on
orders.
The Hyderabad Metro order valued at about Rs120b, which will be awarded to
L&T on a BOT basis, faces the task of achieving financial closure by March FY11.
The company suspects its EPC order to be pushed to the next year.
Many bulk ordering packages in various segments are being broken down into multiple
packages with smaller order values and limited scope of work, which is leading to
delays in order awards.
The management is confident of achieving 25% YoY revenue growth in FY11. We
model revenue growth of 22% in FY11 implying 18% growth in 4QFY11 revenue.
EBITDA margins for future orders are under pressure as 40% of orders are on a
fixed-price basis and face the pressure of high raw material costs.
The total project cost of the BOT projects is Rs600b and EPC orders in segments
like urban infrastructure, hydroelectric power and the metro rail are pending to be
awarded to L&T E&C.
L&T commissioned a BTG plant in 3QFY11. It has capacity of 4GW and forays
into shipping and forging are on track.
Valuation and view
We downgrade our FY12 and FY13 revenue estimates by 1% and 14% respectively and
PAT estimates by 4% and 10% respectively due to lower order intake in FY11 and FY12.
Our intake assumptions are Rs748b (Rs891b earlier) (up 7.5% YoY) for FY11 and Rs921b
(up 24% YoY) for FY12. Our consolidated EPS is Rs90 (up 21% YoY) for FY12 and
Rs107 (up 19% YoY) for FY13. We expect EBITDA margins of 12.3% for FY12 (down
50bp YoY) and 12.5% for FY13 (up 20bp YoY). We have reduced our target price to
Rs1,919 (Rs2,356 earlier) on an SOTP basis by reducing the target multiple for L&T
standalone to 22x FY12E (25x FY12 earlier). We believe the lower P/E multiple factors in
lower PAT CAGR of 19% over FY11-13 against 24% earlier as growth in intake declines
and execution timelines increase going forward. Maintain Buy.
Company description
L&T is India’s largest engineering and construction
company. It undertakes projects on engineering,
procurement and commissioning basis. Its business is
categorized in three segments, viz. Engineering and
construction (E&C), Electrical and Electronics (E&E) and
other diversified businesses. It has many subsidiaries and
associate companies which will gradually start adding
robustly to its bottom-line.
Key investment arguments
L&T is best placed with across-the-board presence in
infrastructure segments.
L&T has tied up with GE Hitachi, AECL (Canada) and
Westinghouse for ABWR and PHWR reactor
technology. Nuclear Power in India is likely to attract
investments of Rs1,600b over 8-10 years and ordering
for projects is expected to begin from FY11.
L&T has a presence in financial services (L&T Finance/
Infra Finance) and IT/ITES (L&T Infotech). In the
past 2-3 years, these businesses have attained critical
scale. With L&T's plan to grow the IT/ITES and its
infrastructure finance businesses to 40% of group
revenue by FY14,we see organic and inorganic scaling
up of the two verticals in 2-3 years. L&T is exploring
opportunities to grow inorganically in the IT services
segment.
Key investment concerns
Order intake is driven by long gestation projects and is
unlikely to favorably impact FY11 or FY12 revenues
and margins.
An unfavorable political climate, logjams relating to
clearances for projects stifle fresh order intake growth,
hampering earnings growth.
Recent developments
L&T has been awarded the construction of an airport
terminal building in Oman worth Rs22b.
L&T was awarded a complete BoP package for the
2x 600MW TPS by the Dainik Bhaskar group in
Chhattisgarh, worth Rs15b.
Valuation and view
We estimate L&T to report revenue and PAT CAGR
of 23% and 20% over FY11-13. Our consolidated EPS
is Rs90 (up 21% YoY) for FY12 and Rs107 (up 19%
YoY) for FY13. Our EBITDA margins are 12.3% for
FY12 (down 50bp YoY) and 12.5% for FY13 (up 20bp
YoY). We value L&T on an SOTP basis with a price
target of Rs1,919 and have a Buy rating on the stock.
We ascribe a P/E multiple of 22x FY12E for L&T
standalone (Rs1,553/share) and Rs387/share for L&T's
other subsidiaries.
Sector view
We maintain our positive view on the sector.
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