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Larsen & Toubro
Overweight
LART.BO, LT IN
Selling its electrical business?
• Newspapers (eg, Mint) have reported on the likelihood of L&T
selling its electrical business, at what appears a high valuation of
US$3B. Mgt has not issued any confirmation or denial of the same.
Schneider and Eaton Corp are reported to be among the potential suitors.
• An overview on the business: L&T’s electrical business manufactures
switchgears, circuit breakers, switchboards and control / automation
products catering to the factory automation needs of industries. Besides
its flagship manufacturing location at Powai, Mumbai, it also has
factories at four other locations in India and one in China. Comparables
include ABB, Siemens, Crompton Greaves, Havells: L&T’s products are
more weighted towards low and medium voltages. The electrical
business revenue and EBITDA for FY10 were Rs29.9B and Rs4.2B,
while those for 9mFY11 were Rs22B and Rs2.7B. YTD, electrical
business has seen 10% revenue growth and 12.2% EBITDA margin, a
decline of 180bps. The growth is below average for the company
considering its overall portfolio, while the margin decline is on account
of pricing pressures that various players have been highlighting.
• Our view on the speculated valuation: Assuming newspaper reports of
US$3B refer to the EV, the implied EV/EBITDA based on our FY11 / 12
estimates is 28x and 24x. This appears quite steep, and well above our
implied EV/EBITDA of 19x and 16x FY11/12E, for the parent-held
businesses. ABB, Siemens and Crompton Greaves trade at FY12E
EV/EBITDA multiples of 24.6x, 16x and 9.7x. Such a steep ask for the
business could possibly factor in a premium for the Powai location.
• Positives of a sale (if it happens): a) at this value, undoubtedly a good
outcome and helps capture the latent value of prime real estate, b) exit a
business where the technological barrier to entry is relatively low and
competition is high and growing, and c) free up resources for other
capex-heavy projects like Hyderabad Metro and banking (if L&T obtains
its banking license as mgt has publicly stated it wishes to apply for one).
• Negatives of a potential sale: a) minor synergy loss on account of
captive products for its T&D and automation projects business.
However, given growing competition, ‘buying’ may make more sense
than ‘making’, b) this business was mature and a cash cow, with RoCE at
35%. On the whole, sale of this business in our view would represent a
very major churn in L&T’s portfolio from cash-cow oriented ones to
asset heavy ones.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Larsen & Toubro
Overweight
LART.BO, LT IN
Selling its electrical business?
• Newspapers (eg, Mint) have reported on the likelihood of L&T
selling its electrical business, at what appears a high valuation of
US$3B. Mgt has not issued any confirmation or denial of the same.
Schneider and Eaton Corp are reported to be among the potential suitors.
• An overview on the business: L&T’s electrical business manufactures
switchgears, circuit breakers, switchboards and control / automation
products catering to the factory automation needs of industries. Besides
its flagship manufacturing location at Powai, Mumbai, it also has
factories at four other locations in India and one in China. Comparables
include ABB, Siemens, Crompton Greaves, Havells: L&T’s products are
more weighted towards low and medium voltages. The electrical
business revenue and EBITDA for FY10 were Rs29.9B and Rs4.2B,
while those for 9mFY11 were Rs22B and Rs2.7B. YTD, electrical
business has seen 10% revenue growth and 12.2% EBITDA margin, a
decline of 180bps. The growth is below average for the company
considering its overall portfolio, while the margin decline is on account
of pricing pressures that various players have been highlighting.
• Our view on the speculated valuation: Assuming newspaper reports of
US$3B refer to the EV, the implied EV/EBITDA based on our FY11 / 12
estimates is 28x and 24x. This appears quite steep, and well above our
implied EV/EBITDA of 19x and 16x FY11/12E, for the parent-held
businesses. ABB, Siemens and Crompton Greaves trade at FY12E
EV/EBITDA multiples of 24.6x, 16x and 9.7x. Such a steep ask for the
business could possibly factor in a premium for the Powai location.
• Positives of a sale (if it happens): a) at this value, undoubtedly a good
outcome and helps capture the latent value of prime real estate, b) exit a
business where the technological barrier to entry is relatively low and
competition is high and growing, and c) free up resources for other
capex-heavy projects like Hyderabad Metro and banking (if L&T obtains
its banking license as mgt has publicly stated it wishes to apply for one).
• Negatives of a potential sale: a) minor synergy loss on account of
captive products for its T&D and automation projects business.
However, given growing competition, ‘buying’ may make more sense
than ‘making’, b) this business was mature and a cash cow, with RoCE at
35%. On the whole, sale of this business in our view would represent a
very major churn in L&T’s portfolio from cash-cow oriented ones to
asset heavy ones.
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