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Larsen & Toubro
Site visit takeaways
We visited L&T's Hazira campus and also had a discussion with the head of their
power business, Mr. Ravi Uppal. Mr. Uppal, while acknowledging the current
problems faced by the power sector, is optimistic of the long-term growth
prospects. Following are the key highlights of the visit:
! The company is bullish on the power sector despite current hurdles. Coal availability, which is
stuck due to environmental clearances, is the biggest issue for the power sector, but the
company is hopeful that sooner than later the government will address this, which should
bring the sector back on track.
! L&T is the only full-fledged engineering company in India in the entire power sector chain
from fuel supply to power distribution, with the capability of meeting almost 85% of the
requirements in-house
! The company has 5,000MW capacity of main plant equipment and 10,000MW of Balance of
Plant (BoP). The company has around 10,000MW of projects which are under various stages
of construction.
! In this business, the company is targeting revenue of US$3bn by 2015 and said that margins
will be in line with L&T overall EBITDA margins, ie 13-14% range.
! Company is seeing a discernible change in the needs of the power sector, with the delivery
schedules becoming more important than pricing. Earlier the company was quoting delivery
times in the range of 48-51 months but now is quoting 42 months based on customer needs.
! New power plants being planned are all supercritical, and the company is able to offer a
station heat rate of 1830-1835kcal vs the Central Electricity Authority(CEA) stipulated heat
rate of 1850kcal
! L&T is also pursuing the strategy of forming state joint ventures, similar to BHEL. The
company has a JV with Karnataka and is currently talking to various other states.
! Apart from power, the company also outlined its capabilities in heaving engineering,
fabrication and shipbuilding at Hazira. These capabilities are being further expanded at their
new site in Katupally in Tamilnadu.
! We have a Hold rating on the company. Stock trades at 22xFY12 earnings.
Valuation and risks to target price
Larsen & Toubro (RIC: LART.BO, Rec: Hold, CP: Rs1664.75, TP: Rs1800.00): Key downside risks to our sum-of-the-parts-based target price are: 1) delays in orderbook execution due
to government policy issues or other external factors; 2) government policy changes, which may affect spending on infrastructure projects; and 3) sharp volatility in oil prices affecting
infrastructure spending in the Middle East. Key upside risks are: 1) stronger-than-anticipated order flows; and 2) better-than-expected margins.
Bharat Heavy Electricals (RIC: BHEL.BO, Rec: Buy, CP: Rs2126.45, TP: Rs2601.00): The key downside risks to our DCF-based target price include a delay in payment or cancellation
of projects under execution, and rupee appreciation widening the gap with the Chinese. Upside risks are measures by the Indian government to assure business for BHEL and the
appreciation of the renminbi against the rupee, making Chinese players relatively less cheap.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro
Site visit takeaways
We visited L&T's Hazira campus and also had a discussion with the head of their
power business, Mr. Ravi Uppal. Mr. Uppal, while acknowledging the current
problems faced by the power sector, is optimistic of the long-term growth
prospects. Following are the key highlights of the visit:
! The company is bullish on the power sector despite current hurdles. Coal availability, which is
stuck due to environmental clearances, is the biggest issue for the power sector, but the
company is hopeful that sooner than later the government will address this, which should
bring the sector back on track.
! L&T is the only full-fledged engineering company in India in the entire power sector chain
from fuel supply to power distribution, with the capability of meeting almost 85% of the
requirements in-house
! The company has 5,000MW capacity of main plant equipment and 10,000MW of Balance of
Plant (BoP). The company has around 10,000MW of projects which are under various stages
of construction.
! In this business, the company is targeting revenue of US$3bn by 2015 and said that margins
will be in line with L&T overall EBITDA margins, ie 13-14% range.
! Company is seeing a discernible change in the needs of the power sector, with the delivery
schedules becoming more important than pricing. Earlier the company was quoting delivery
times in the range of 48-51 months but now is quoting 42 months based on customer needs.
! New power plants being planned are all supercritical, and the company is able to offer a
station heat rate of 1830-1835kcal vs the Central Electricity Authority(CEA) stipulated heat
rate of 1850kcal
! L&T is also pursuing the strategy of forming state joint ventures, similar to BHEL. The
company has a JV with Karnataka and is currently talking to various other states.
! Apart from power, the company also outlined its capabilities in heaving engineering,
fabrication and shipbuilding at Hazira. These capabilities are being further expanded at their
new site in Katupally in Tamilnadu.
! We have a Hold rating on the company. Stock trades at 22xFY12 earnings.
Valuation and risks to target price
Larsen & Toubro (RIC: LART.BO, Rec: Hold, CP: Rs1664.75, TP: Rs1800.00): Key downside risks to our sum-of-the-parts-based target price are: 1) delays in orderbook execution due
to government policy issues or other external factors; 2) government policy changes, which may affect spending on infrastructure projects; and 3) sharp volatility in oil prices affecting
infrastructure spending in the Middle East. Key upside risks are: 1) stronger-than-anticipated order flows; and 2) better-than-expected margins.
Bharat Heavy Electricals (RIC: BHEL.BO, Rec: Buy, CP: Rs2126.45, TP: Rs2601.00): The key downside risks to our DCF-based target price include a delay in payment or cancellation
of projects under execution, and rupee appreciation widening the gap with the Chinese. Upside risks are measures by the Indian government to assure business for BHEL and the
appreciation of the renminbi against the rupee, making Chinese players relatively less cheap.
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