UBS: L & T - Targets US$3bn revenue by 2015 in BTG

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UBS Investment Research
L & T
Targets US$3bn revenue by 2015 in BTG
business
􀂄 Launches full-scale operations at power equipment manufacturing facilitiy
L&T has launched full-scale operations at the production facilities of L&T-MHI
JV in Hazira, Gujarat. Since it is the first domestic private player to do so, we
believe it would have a significant competitive advantage as other private
companies may require a higher proportion of import content in their equipment (at
least in the initial orders). We are positive on the outlook for this business. Please
refer to our note, L&T—Power business: strong growth driver, published on 17
September 2010.

􀂄 L&T is a strong contender for NTPC bulk tender
According to media reports, L&T, BHEL and BGR are the three contenders for
NTPC’s 11*660MW bulk tender (price bids to be submitted by 20 January 2011).
We expect the pricing to be reasonable and think L&T is a strong contender given
its manufacturing facilities are already set up. Please refer to our note BHEL:
Boiler order: three bidders for NTPC bulk tender dated 10 January 2011.
􀂄 3Q results next week: full-year guidance is a key to stock performance
We expect profit after tax (PAT) of Rs8.3bn in Q3FY11 (6% above consensus).
L&T had guided for 25%/20% YoY growth in order flow/ revenue. Based on
orders announced in October-December 2010, we estimate Q4 order flow would
need to rise ~35% YoY (-15% excluding the Hyderabad Metro order at Rs120bn)
to achieve the guidance.
􀂄 Valuation: maintain Buy rating; top pick in Indian infra space
We maintain our sum-of-the-parts-based price target of Rs2,400.


Q3FY11 results expectations
We expect Q3FY11 revenue of Rs108bn, EBITDA margin of 11.5%, and PAT
of Rs8.3bn.


L&T had guided for 25% growth in order inflows, 20% growth in revenue, and
stable margins (a band of 50pts around 13%) for FY11. It has announced orders
of ~Rs110bn in October-December 2010; we estimate Q3 order inflow could be
~Rs185bn. This would imply a growth of about 20% in 9MFY11 (with total
order flows of about Rs545bn). Q4 orders would need to be ~Rs325bn (+35%
YoY) to meet guidance (-14% excluding the Hyderabad Metro order at
Rs120bn).

Power business: strong growth driver
Media reports suggest that L&T is targeting around 10 BTG orders over the next
one year. It currently has an order backlog of over Rs250bn (6,600MW boilers
and 8,200MW turbines) which it hopes to double in three years (according to
media reports).
In addition to the current bulk tender, NTPC is also considering the second
round of bulk tendering (7,200MW or 9x800MW each) in FY12; L&T will
stand a good chance here too, in our view, given its head-start (has already
commissioned its manufacturing units).
Further, L&T is also likely to benefit from its own power development
subsidiary, with plans for an operational capacity of 10,000MW over the next
eight years (it is currently setting up 1,320MW in Punjab and 1,600MW in
Chattisgarh).
L&T’s manufacturing facilities have a capacity of 5,000MW, which it had
planned to increase to 6,000MW. However, the plans were shelved as the
government has not imposed any duty on imported equipment (which was
earlier expected).


Valuation
We have a Buy rating with a SOTP-based price target of Rs2,400.