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Larsen & Toubro Limited
Big Daddy
Investment rationale
Infrastructure spend for XIIth plan estimated to be ~USD1tn
Post the mid term appraisal of XIth plan, the infrastructure spend is expected
to be ~USD500-550bn. Initial estimates for XIIth plan is ~USD1tn and key
sectors are power, roads, ports and airports. Larsen with competence across
these sectors is poised to be one of the key beneficiaries. Further, the company
provides services for the oil & gas and process industry which would be the
other driver of the economy going forward.
Power BTG capacity in line, benefits to accrue
L&T's manufacturing facility for Boiler and Turbine has been set up with total
output at ~4,000MW. While there have been a lot of players to show interest
in setting up similar BTG facility, we believe Larsen has an advantage over
others both from the perspective of facility in place and also its long term
brand as one of the best engineering companies in India.
Value unlocking round the corner for L&T Finance and Infotech
L&T Finance in FY10 reported a profit of INR1.6bn - a growth of 60%YoY.
The company has filled for an IPO for the same. L&T Infotech would scale up
in size, enabling it to bid for larger projects. We expect the potential listing of
L&T Finance and L&T Infotech would be a key trigger for the stock.
We believe the key concern with the company so far had been the revenue
pick up, which we feel, has been finally addressed. Our EPS for FY11e and
FY12e stands at INR70 and INR91, respectively. Our SOTP value is INR2,167.
We have valued standalone business at 23x earnings FY12e. The other key
subsidiaries: a) L&T Finance Holdings Limited has been valued at 1.5x book
value FY12e. b) L&T Infotech and IT businesses has been valued at 15x
FY12e estimates. c) L&T IDPL & L&T Urban Infrastructure has been valued at
1.5x book value of FY12e and d) Supercritical JV at INR50bn.
Investment rationale
Infrastructure spend for XIIth plan estimated to be ~USD1tn
As per the midterm appraisal of XIth FYP, the investment in infrastructure is expected to
be in the region of ~USD500 - 550bn. The estimated investment in infrastructure for XIIth
FYP is expected to be ~USD1tn. Majority of these investments will happen in sectors like
power, roads, ports and airports. Larsen with competence across these sectors is poised
to be one of the key beneficiaries. Further, it provides services for the oil & gas and
process industry which would be other drivers of the economy going forward. The gross
investment in capital formation in infrastructure as a percentage of GDP has substantially
increased from 3.3% in FY03 to 7.2% in FY09. This is likely to increase to 8.0% in
FY12e and 10% in XIIth FYP as per mid-term appraisal by Planning Commission. The
infrastructure investment is likely to be more than USD1tn or USD150bn per annum in
XIIth FYP. Except for Telecom, L&T has been a leader in each segment of infrastructure
sector. We expect a nominal growth rate of 14% in infrastructure investment in XIIth FYP
and we expect LT to grow at a higher rate of 22 - 25% compared to industry average.
Power BTG capacity in line, benefits to accrue
L&T and MHI have jointly set up a BTG manufacturing facility of ~4,000MW at Hazira,
Gujarat. While there have been a lot of players to show interest in setting up similar
BTG facilities; attracted by huge opportunity in the BTG space, however we believe
L&T has an advantage over other new players as the facility has already commenced
production supported by its superior brand value built over its strong execution record.
L&T is also setting up dedicated factories for axial fans, air-pre heaters, electrostatic
precipitators, high pressure piping and a forging plant at Hazira. The company intends
to manufacture 80% of the components in the Boiler segment and 60-70% in Turbine
segment domestically. This will help the company to earn higher margins and remain
competitive in long term.
Value unlocking round the corner in key subsidiaries
L&T Finance Holdings Limited, a wholly-owned subsidiary, has reported revenue of
INR9.6bn and PAT of INR1.6bn in FY10. The revenue and PAT grew 16% and 60%
YoY, respectively. Another key subsidiary L&T Infotech would scale up in size, enabling
it to bid for larger projects. We expect the potential listing of L&T Finance and L&T
Infotech would be a key trigger for the stock. We expect the value unlocking in both
the subsidiaries by FY12/13.
L&T Finance Holdings has filed for an IPO on September 27, 2010 and is expected to
raise INR15bn. The company vests interests in infrastructure finance, retail finance &
corporate finance and investment management businesses through its subsidiaries
L&T Infrastructure Finance, L&T Finance and L&T Investment Management.
We have valued L&T Finance Holdings Ltd on a Price to Book of 1.5x FY12e book
value. The FY12e book value of L&T Finance, L&T Infrastructure Finance and other
businesses stands at INR28bn thereby arriving at a value of INR75 per share. There
could be further upside in our valuation depending on the IPO price of L&T Finance
Holdings Limited.
L&T Infotech Limited is a information technology solution provider and reported net
revenue growth of 22% YoY to INR11.5bn while PAT grew at 32% YoY to INR1.6bn in
H2FY11.We estimate revenues of INR24.2bn and PAT of INR3.9bn in FY12e. We
value L&T Infotech at 15x FY12e PAT, which we believe is reasonable in view of its
peers such as Patni Computer Systems and Tech Mahindra trading at similar multiples.
Valuation and outlook
We believe the key concern with the company so far had been the revenue pick up,
which we feel, has been finally addressed. Our EPS for FY11e and FY12e stands at
INR70 and INR91, respectively. We recommend a BUY with a SOTP target price of
INR2,167 providing a potential return of 11%.
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