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Larsen & Toubro Ltd.
How much is L&T E&E worth;
is divestment worth it?
„E&E divestment could fund 48% of Infra equity; Buy
According to media reports L&T is reportedly looking to divest its Electronic & Electrical
(E&E) division which contributes ~7% to parent revenue. L&T board approved the
demerger of E&E division at its meeting last Wednesday, per media. This in our view is
part of L&T's move to exit businesses which are dilutive on returns, where it doesn't have
clear leadership and re-allocate capital. L&T is set for Rs613bn of capex in Infra
development businesses, which needs ~Rs184bn (assuming 30%) as equity. Based on
our target valuations we estimate the E&E could be worth Rs77bn (comps) - Rs89bn
(SOTP). Any strategic premium would be value accretive. However, we are not
convinced that the new infra assets of L&T could create value vs its asset light E&E.
Backlog at Rs1.15tn +26%YoY to drive EPS CAGR of 27% (FY11-13E) & creation of
growth vehicles in power equipment, shipyard, defense, nuke, Aerospace domains and
concession wins drive our Buy. Capex in lower RoE infra assts – Rajpura Power,
Hyderabad metro etc. are risks.
Board approves demerger of E&E division; set to divest?
According to media report L&T is in talks with Schneider Electric and Eaton Corp
to sell its E&E division. According to the report, the company approved the
demerger of E&E division at a board meeting on Wednesday. We value the
consol E&E business at Rs89bn - parent E&E division at Rs72bn based on 12.1x
1-year forward EV/EBITDA and its international subsidiary, Tamco, contributing
16% to consol E&E revenue in FY10 (18% to consol EBITDA) could fetch Rs17bn
at parent EV/EBITDA. On comps, the business could be valued at Rs77bn at
10.4x 1 year forward EV/EBITDA of Crompton vs media reported valuation of
Rs120-140bn. So any strategic premium could be value accretive in the short
term. However, we are not convinced that new infra assets of L&T could create
higher value vs its asset light E&E business.
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.
How much is L&T E&E worth;
is divestment worth it?
„E&E divestment could fund 48% of Infra equity; Buy
According to media reports L&T is reportedly looking to divest its Electronic & Electrical
(E&E) division which contributes ~7% to parent revenue. L&T board approved the
demerger of E&E division at its meeting last Wednesday, per media. This in our view is
part of L&T's move to exit businesses which are dilutive on returns, where it doesn't have
clear leadership and re-allocate capital. L&T is set for Rs613bn of capex in Infra
development businesses, which needs ~Rs184bn (assuming 30%) as equity. Based on
our target valuations we estimate the E&E could be worth Rs77bn (comps) - Rs89bn
(SOTP). Any strategic premium would be value accretive. However, we are not
convinced that the new infra assets of L&T could create value vs its asset light E&E.
Backlog at Rs1.15tn +26%YoY to drive EPS CAGR of 27% (FY11-13E) & creation of
growth vehicles in power equipment, shipyard, defense, nuke, Aerospace domains and
concession wins drive our Buy. Capex in lower RoE infra assts – Rajpura Power,
Hyderabad metro etc. are risks.
Board approves demerger of E&E division; set to divest?
According to media report L&T is in talks with Schneider Electric and Eaton Corp
to sell its E&E division. According to the report, the company approved the
demerger of E&E division at a board meeting on Wednesday. We value the
consol E&E business at Rs89bn - parent E&E division at Rs72bn based on 12.1x
1-year forward EV/EBITDA and its international subsidiary, Tamco, contributing
16% to consol E&E revenue in FY10 (18% to consol EBITDA) could fetch Rs17bn
at parent EV/EBITDA. On comps, the business could be valued at Rs77bn at
10.4x 1 year forward EV/EBITDA of Crompton vs media reported valuation of
Rs120-140bn. So any strategic premium could be value accretive in the short
term. However, we are not convinced that new infra assets of L&T could create
higher value vs its asset light E&E business.
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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