Macquarie Research, Larsen & Toubro Takeaways from conference; target rs 2215

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Larsen & Toubro
Takeaways from conference
Event
 We hosted L&T at our annual India conference on 14 February. We remain
confident about the company’s medium-term growth prospects and maintain
that the order inflow concerns are overdone. Reiterate L&T as our top pick in
the large cap India engineering and construction space as well as our target
price of Rs2,215.

Impact
 March remains critical for order inflow guidance, still should not impact
long-term value: The company continues to maintain that its pipeline of
orders remains healthy; however, a decision on these projects needs to be
made in the next six weeks. L&T is not unduly worried about slight
postponement in orders as long as it is awarded in early FY12. FY11 order
inflows depend on certain large ticket items like Hyderabad metro and boiler
tender.
 Concerns on Hyderabad metro award overdone: Financial closure for the
Hyderabad metro is on track to be done by March 2011. However, metro
order would flow into the parent’s order book only after the realignment issue
over 4–5km stretch is sorted out with the state government. L&T is not averse
to waiting for some time before starting the concession period.
 Revenue visibility very high in the near term: As per the company, 90% of
FY11 revenues are based on its opening order book, which gives it very high
visibility. Similarly, getting into FY12, the visibility should continue to remain at
elevated levels, possibly not at 90%.
 Volatility on margins unlikely to be high: L&T has only 30% of its projects
with fixed prices, which also build a certain level of inflation during bidding.
Further, with cement prices likely to remain flat, margin pressure is limited in
the E&C division. Product prices are being revised more frequently to pass on
commodity price hikes.
 Targeting mid-teen margins in power equipment in medium to long term:
L&T will indigenise boiler and turbine technology in 2.5 and 3 years,
respectively. While margins will be in the 5–7% range in initial years, they are
expected to stabilise at 15% in 3–4 years time.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,215.00 based on a Sum of Parts methodology.
 Catalyst: pickup in execution and order inflow.
Action and recommendation
 Best play on India infrastructure story, in our view; maintain
Outperform: We believe L&T’s near-term earnings are well placed due to its
large order book. The market has already factored in disappointment on order
inflows in FY11 while execution continues to be strong. L&T is trading at a
discount to its long-term average multiple of 16x FY12 EPS (adj. for subs).