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COMPANY UPDATE
Larsen & Toubro (LART.BO)
Neutral Equity Research
Modest value unlocking from L&T Finance spin-off, retain Neutral
What's changed
L&T has filed a draft prospectus to spin off its finance business and list it
as a separate entity. The businesses intended to be listed under L&T
Finance Holding Ltd (LTFHL) before Q4FY11-end include the infrastructure
finance, retail & corporate finance, and investment management
subsidiaries. As of FY10 end, L&T’s finance division had a loan book of
Rs114 bn and revenue of Rs14 bn for FY10.
The spin-off and the listing of the finance business will likely unlock value
for the business as L&T plans to grow it as a separate business and intends
to apply for and acquire a banking license to start banking operations in
India. We raise our valuation for these subsidiaries to Rs67 bn from Rs45 bn
earlier based on additional information available in the draft prospectus. Due
to limited visibility, we do not include any value for the potential banking
license that the company intends to apply for. However, obtaining a banking
license could result in substantial upside to value as seen in past examples
such as for Kotak Mahindra Bank during 2003-2004.
Valuation
On the back of this revision, we raise our 12-m SOTP-based TP to Rs2,146
from Rs2,109 implying 14% upside from current levels. We retain our
Neutral rating as we still see valuations as relatively reasonable at 23X 12-
m forward P/E vs. 5-year mean 12-m forward P/E of 21.5X with some
expected headwinds over the next 3-6 months (interest rate hikes,
upcoming elections).
Key risks
Upside: 1) Faster-than-expected industrial capex recovery; 2) Faster-than
expected ramp-up in execution across projects. Downside: 1) Increase in
competition, leading to aggressive bidding; 2) Delay in award of
infrastructure contracts by the government or government agencies; 3)
Weaker industrial capex
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