Larsen and Toubro- Riding the Infra wave; initiate with Buy -Anand Rathi

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Larsen and Toubro
Riding the Infra wave; initiate with Buy
We initiate coverage on L&T with Buy, on the back of its robust
core business, infrastructure opportunities and potential for
value unlocking in subsidiaries. Core business would drive
earnings, given robust order book and good revenue visibility.
Subsidiaries in IT Services, Financials and Infra would be
valuation triggers. The infra-led growth would also be backed by
growing portfolio and geographical reach via JVs/acquisitions.

 Good revenue visibility. L&T is geared to meet growth guidance
of 20% in sales in FY11, given its robust order book of `1.1trn
(3.1x FY10 standalone sales; up 26% yoy), orders (`494bn; up 8%
yoy in 9MFY11), and pick up in execution.
 JVs/acquisitions to expand portfolio and market reach.
Increased presence in key infra segments (thermal, nuclear power,
oil & gas, ports), power equipment manufacturing and
geographies would complement core competency in EPC.
 Subsidiaries unlocking value. Revival in IT business and high
growth in financial services and infra development would be
catalysts for valuations upside. L&T’s financial services arm is
likely to be listed in FY12, followed by other subsidiaries.
 Valuation and risks. Our SOTP-based target price is `2,040 –
core business at `1,564 based on 22x FY12e EPS; subsidiaries and
other businesses at `476. Key risks: Lagging execution; slower
revival in industrial capex and exports.