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India Equity Research Reports, IPO and Stock News
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Quick Comment – What's new: According to Reuters,
Larsen & Toubro is in talks with several engineering
firms to sell its electrical and electronics unit in a deal
that could be worth up to US$3 billion (based on 4x
F2011e revenues). Reuters said the talks are supposed
to be with various companies, including France's
Schneider Electric and US diversified industrial firm
Eaton Corp, with the deal likely to be sealed in the next
few weeks.
Impact on our views: We believe that at the quoted
valuations, this deal would lead to a stronger P&L
(F2012-13e EPS rising by 4-5% and balance sheet
(15% of market cap explicable in net cash), hence
boosting the stock price performance.
√ MSe fair value of US$1.5-1.8bn: Given our
expectation of the unit earning EBITDA of Rs5.9bn
on a revenue base of Rs40bn, and the valuations of
domestic peers around 11x EV/EBITDA, we would
have expected a fair value of Rs65bn (US$1.5bn).
However, discounting the cash flows in a residual
income model (which we do for L&T), we get a value
of Rs78bn (US$1.8bn) for the division.
√ Valuation >US$1.6bn to be EPS accretive:
Assuming that the company can deploy the cash at
a 5% post tax rate, a valuation of around US$1.5bn
would be EPS neutral for the company, with the
quoted US$3bn valuation driving our F2012-13e
EPS up 4-5%, despite our already being 12-14%
ahead of consensus
√ 15% of market cap explicable by cash if deal
goes through: However, we believe that the bigger
trigger would be the release of cash into the system.
We believe that the market does not recognize that
L&T is a debt-free company at present .
However, the deal would imply that 15% of L&T’s
market cap would be in cash on the balance sheet.
Investment thesis: While L&T, in revenue terms, is larger than
the next six largest construction companies put together, owing
to the fragmented market (L&T’s market share is still only 2.5%
in Indian capex) and its high-quality execution, it has
consistently gained market share over the last two decades. It
is also the vendor of choice for the private sector, making it the
best way to play the structural growth story in Indian
infrastructure, in our view. Our price target of Rs2,268 per
share implies a 31% return from current levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Quick Comment – What's new: According to Reuters,
Larsen & Toubro is in talks with several engineering
firms to sell its electrical and electronics unit in a deal
that could be worth up to US$3 billion (based on 4x
F2011e revenues). Reuters said the talks are supposed
to be with various companies, including France's
Schneider Electric and US diversified industrial firm
Eaton Corp, with the deal likely to be sealed in the next
few weeks.
Impact on our views: We believe that at the quoted
valuations, this deal would lead to a stronger P&L
(F2012-13e EPS rising by 4-5% and balance sheet
(15% of market cap explicable in net cash), hence
boosting the stock price performance.
√ MSe fair value of US$1.5-1.8bn: Given our
expectation of the unit earning EBITDA of Rs5.9bn
on a revenue base of Rs40bn, and the valuations of
domestic peers around 11x EV/EBITDA, we would
have expected a fair value of Rs65bn (US$1.5bn).
However, discounting the cash flows in a residual
income model (which we do for L&T), we get a value
of Rs78bn (US$1.8bn) for the division.
√ Valuation >US$1.6bn to be EPS accretive:
Assuming that the company can deploy the cash at
a 5% post tax rate, a valuation of around US$1.5bn
would be EPS neutral for the company, with the
quoted US$3bn valuation driving our F2012-13e
EPS up 4-5%, despite our already being 12-14%
ahead of consensus
√ 15% of market cap explicable by cash if deal
goes through: However, we believe that the bigger
trigger would be the release of cash into the system.
We believe that the market does not recognize that
L&T is a debt-free company at present .
However, the deal would imply that 15% of L&T’s
market cap would be in cash on the balance sheet.
Investment thesis: While L&T, in revenue terms, is larger than
the next six largest construction companies put together, owing
to the fragmented market (L&T’s market share is still only 2.5%
in Indian capex) and its high-quality execution, it has
consistently gained market share over the last two decades. It
is also the vendor of choice for the private sector, making it the
best way to play the structural growth story in Indian
infrastructure, in our view. Our price target of Rs2,268 per
share implies a 31% return from current levels.
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