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Larsen & Toubro Ltd.
Feedback from India Conference
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„To transform into an Infra developer
L&T intends to transform into an Infra developer to a less volatile but a high
capex, long gestation and annuity driven model vs low capex, high RoE and
volatile E&C business. To achieve this L&T has embarked on Rs613bn capex in
Infra development business led by Power (Rs210bn), Metro Rail (Rs150bn) and
Roads (Rs132bn), which is >2x the size of L&T’s current balance sheet. This
strategy shall drive orders in the near term, but we fear, it could structurally lower
its RoE, as well.
Stands by its guidance
L&T reiterated its 20%YoY sales / 25% inflows growth target for FY11E as all the
key reasons for the miss in 3Q reverse, such as delayed orders. Potential large
prospects till FY12:
1. NTPC 9x800MW BTG order & 2x800MW order from its JV,
2. Midget submarine order of US$4bn for set of 6 submarines,
3. Direct offset of 50% from fighter aircraft purchase by India worth US$12bn
and
4. NMDC 3mtpa steel plant.
Power business could impact margins near term
L&T said margins are expected to be lower for super critical projects at ~6%.
Power business is expected to hurt overall margins till the ramp up has been
achieved.
Creating platform for sustainable growth
While the going is good in its core E&C business as L&T is investing in creating
platforms for its future growth in super-critical power plants with MHI, shipyard,
railways, defense, Nuke & Aerospace domains.
Price objective basis & risk
Larsen & Toubro (LTOUF / LTORF)
Our PO of Rs2280 (US$50/GDR) for L&T is based on sum-of-the-parts valuation.
We have valued the core business at Rs1850 per share at a PER of 19x of
estimated1 year forward EPS, at 5% discount to BHEL. L&T International is
valued at 1.5x book value at Rs19 per share. Its 97.5pct stake in L&T IDPL
(Infrastructure SPVs) is valued at L&T acquisition value of IDFC stake in 4Q10 -
2.4x FY12E P/BV at Rs80 per share. The 100% stakes in three Road BOT
projects are valued at1.5x FY12E P/BV at Rs29 per share. The stakes in Dhamra
Port (43pct) and L&T Urban Infra (65pct) valued on a DCF basis at Rs14 and
Rs12 per share respectively. The Investment in L&T Seawoods is valued at book
value at Rs14 per share. Its 100pct stake in L&T Infotech is valued at 10x 1-year
forward EPS - in line with niche 2nd tier stocks, at Rs64 per share. The stakes of
100pct in L&T Finance & L&T Infrastructure Finance are valued at 1.6x 1-year
forward P/BV at Rs50 and Rs45 per share respectively. Its 51% stakes in L&T
MHI Boilers and L&T MHI Turbine Generators are valued at 15x 1-year forward
EPS at Rs53 and Rs13 per share respectively. The additional investment in L&T
Power Development and L&T Shipbuilding are valued at book value at Rs15 and
Rs10 per share respectively. Other subsidiaries are valued at 2x book value at
Rs15 per share. Risks to Price Objective: Slowdown in EPS growth on a higher
base, Raw materials, Competition, Project execution.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro Ltd.
Feedback from India Conference
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways...
„To transform into an Infra developer
L&T intends to transform into an Infra developer to a less volatile but a high
capex, long gestation and annuity driven model vs low capex, high RoE and
volatile E&C business. To achieve this L&T has embarked on Rs613bn capex in
Infra development business led by Power (Rs210bn), Metro Rail (Rs150bn) and
Roads (Rs132bn), which is >2x the size of L&T’s current balance sheet. This
strategy shall drive orders in the near term, but we fear, it could structurally lower
its RoE, as well.
Stands by its guidance
L&T reiterated its 20%YoY sales / 25% inflows growth target for FY11E as all the
key reasons for the miss in 3Q reverse, such as delayed orders. Potential large
prospects till FY12:
1. NTPC 9x800MW BTG order & 2x800MW order from its JV,
2. Midget submarine order of US$4bn for set of 6 submarines,
3. Direct offset of 50% from fighter aircraft purchase by India worth US$12bn
and
4. NMDC 3mtpa steel plant.
Power business could impact margins near term
L&T said margins are expected to be lower for super critical projects at ~6%.
Power business is expected to hurt overall margins till the ramp up has been
achieved.
Creating platform for sustainable growth
While the going is good in its core E&C business as L&T is investing in creating
platforms for its future growth in super-critical power plants with MHI, shipyard,
railways, defense, Nuke & Aerospace domains.
Price objective basis & risk
Larsen & Toubro (LTOUF / LTORF)
Our PO of Rs2280 (US$50/GDR) for L&T is based on sum-of-the-parts valuation.
We have valued the core business at Rs1850 per share at a PER of 19x of
estimated1 year forward EPS, at 5% discount to BHEL. L&T International is
valued at 1.5x book value at Rs19 per share. Its 97.5pct stake in L&T IDPL
(Infrastructure SPVs) is valued at L&T acquisition value of IDFC stake in 4Q10 -
2.4x FY12E P/BV at Rs80 per share. The 100% stakes in three Road BOT
projects are valued at1.5x FY12E P/BV at Rs29 per share. The stakes in Dhamra
Port (43pct) and L&T Urban Infra (65pct) valued on a DCF basis at Rs14 and
Rs12 per share respectively. The Investment in L&T Seawoods is valued at book
value at Rs14 per share. Its 100pct stake in L&T Infotech is valued at 10x 1-year
forward EPS - in line with niche 2nd tier stocks, at Rs64 per share. The stakes of
100pct in L&T Finance & L&T Infrastructure Finance are valued at 1.6x 1-year
forward P/BV at Rs50 and Rs45 per share respectively. Its 51% stakes in L&T
MHI Boilers and L&T MHI Turbine Generators are valued at 15x 1-year forward
EPS at Rs53 and Rs13 per share respectively. The additional investment in L&T
Power Development and L&T Shipbuilding are valued at book value at Rs15 and
Rs10 per share respectively. Other subsidiaries are valued at 2x book value at
Rs15 per share. Risks to Price Objective: Slowdown in EPS growth on a higher
base, Raw materials, Competition, Project execution.
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