Larsen & Toubro - Leader in the infra pack:: Macquarie Research

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Larsen & Toubro
Leader in the infra pack
Event
 India’s largest engineering and construction (E&C) company: It has no
real peers within the country in terms of competencies across sectors. The
company’s businesses span a wide spectrum: from complex EPC
(engineering, procurement and commissioning) contracts in the hydrocarbon,
process and metals industries to relatively low-end road projects. It also
manufactures switchgears, fuel dispensers and other industrial goods.
 Subsidiaries gaining substantial size: The Company is also exposed to
other businesses like a) IT services b) infrastructure development c) industrial
goods manufacturing and d) non-banking finance operations through its
wholly-owned subsidiaries, which are growing exponentially in size.

Impact
 Strong pickup in domestic projects to aid growth in FY12: L&T’s domestic
execution has picked up sharply by 40% in 9MFY11. We expect this to drive
27%+ revenue growth in FY12 as 92% of L&T’s order book is domestic.
 Concerns around Hyderabad metro inflow overdone: While we have built
in Hyderabad metro order inflow into our FY11 estimates, we think that even if
this order slips by a month or two, it will not have any meaningful impact on
the revenue estimates for FY12. The valuation of Hyderabad metro is not hit
as the concession of 60 years begins from the date of financial closure.
 Margins to remain stable: L&T is likely to maintain EBITDA margins at 12.5-
13% in FY12 as 70% of its contracts have pass-through clauses giving them
the ability to pass on the raw material price increase to the customers.
 FY12 to turn out to be critical year of developments for L&T:
Maturing key businesses: L&T IDPL will see more than 11 projects
reach the commissioning stage, while the power equipment business will
see robust revenues as plants’ utilisation improves.
Value unlocking in some of the businesses: L&T Finance and possibly
L&T’s IDPL will tap the market for resources for future growth.
Action and recommendation
 Remains best play on India infra story: We believe the strong pickup in
execution rates for L&T will help it deliver strong 27%+ revenue growth in
FY12. L&T is likely to deliver a 27% earnings CAGR over the next 2-3 years.
Valuations are currently at 14x FY12E (adjusted for subs valuation). We
believe L&T remains one of the best plays on significant infra spend and an
upturn in corporate capex cycle in CY11.


Larsen & Tubro Aide Memoire
1. What is the outlook on execution? What are the reasons for a strong pickup in domestic execution? Do you expect it to
continue in FY12? What could be the major challenges in this regard?
2. How do you intend to protect your margins? With strong competition from Korean players in the oil and gas space, how are
you gearing yourself to compete with them?
3. What is your outlook on the industrial and government capex for the next 2-3 years?
4. Do you see a slowdown in infrastructure and industrial capex due to the hardening interest rate cycle?
5. Can you share the details of your recent re-structuring plans? What benefits do you see accruing from the same?
6. What is your plan with your development portfolio? When do you intend to sell/monetise it? What is the comfort level for
your in-house projects as % of total order book?