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India Equity Research Reports, IPO and Stock News
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Industrials
India
Comparing L&T BTG JVs with peers. We compare L&T-MHI BTG JVs with peers and
highlight key takeaways (1) L&T MHI JVs operate at very low overhead costs ( employee,
and SG&A being 6-7% of sales versus 18-20%), providing a strong competitive base,
(2) currently, the contribution margin is negligible (1.6% in FY2011 versus 37-39%) but
it can scale up as indigenization and learning curve benefits come through and (3) total
gross block at Rs8.2 bn (Rs2.8 bn for boiler) is much smaller than capex envisaged by
others, though a part of it may be with the parent.
Employee, SG&A costs are much lower; contribution margin can scale up on greater indigenization
We compare the business performance of L&T- MHI equipment JVs (L&T-MHI Boilers Private
Limited, L&T-MHI Turbine Generators Private Limited) with industry peers. We highlight that L&TMHI
JVs operate at significantly lower employee and SG&A cost as a proportion of sales. The JVs
reported FY2011 employee cost of 4% versus 14-16%. Their SG&A cost in FY2011 amounted to
2.7% of sales versus 4-5%. Lower overhead costs can be a foundation for competitiveness going
forward. However, the JVs reported contribution margin (ex variable expenses) of 1.6% only
versus 37-39%, probably due to high outsourcing, suboptimal scale etc. We expect the difference
in contribution margin to narrow as L&T scales up, gains on the learning curve and reaches higher
levels of indigenization while on the other hand, keen competitors drag down contribution margin
for competition. We do understand the difficulties in concluding from the above comparison as
L&T-MHI JVs’ revenues and margin may have not stabilized, and the peers may have other lines of
business such as EPC execution, exports and other equipment etc.
Much smaller gross block (esp. boiler) versus other players - a part possibly in L&T standalone
We highlight that the L&T-MHI BTG JVs operate at a relatively lower gross block versus the capex
envisaged by other new players. The JVs reported a gross block of Rs8 bn (end-Mar-11) skewed
towards the turbine/generator JV (Rs2.8 bn gross block for boiler JV). This is relatively lower versus
the Rs44 bn capex highlighted by BGR (for full BTG) and Rs7 bn for Thermax (only for boilers). We
believe that a part of the L&T’s capital expenditure (facilities for manufacturing auxiliaries such as
forgings, piping, fans etc) for BTG venture could be included within the parent/other subsidiaries
and are being built in separate subsidiaries or in the standalone entity.
Sizeable equity investments already made by new players; physical progress may be slow
We also cite the infusion of considerable equity by new players into equipment ventures. The L&THitachi
combine has itself invested about Rs4.7 bn of equity as of end-Mar-11. BGR and Hitachi
have also invested Rs1.8 bn in their BTG JVs with Thermax/Babcock, having put in Rs965 mn in
their supercritical boiler JV. Despite such investments, physical progress may be slow based on
delays in the award of NTPC bulk tenders.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Comparing L&T BTG JVs with peers. We compare L&T-MHI BTG JVs with peers and
highlight key takeaways (1) L&T MHI JVs operate at very low overhead costs ( employee,
and SG&A being 6-7% of sales versus 18-20%), providing a strong competitive base,
(2) currently, the contribution margin is negligible (1.6% in FY2011 versus 37-39%) but
it can scale up as indigenization and learning curve benefits come through and (3) total
gross block at Rs8.2 bn (Rs2.8 bn for boiler) is much smaller than capex envisaged by
others, though a part of it may be with the parent.
Employee, SG&A costs are much lower; contribution margin can scale up on greater indigenization
We compare the business performance of L&T- MHI equipment JVs (L&T-MHI Boilers Private
Limited, L&T-MHI Turbine Generators Private Limited) with industry peers. We highlight that L&TMHI
JVs operate at significantly lower employee and SG&A cost as a proportion of sales. The JVs
reported FY2011 employee cost of 4% versus 14-16%. Their SG&A cost in FY2011 amounted to
2.7% of sales versus 4-5%. Lower overhead costs can be a foundation for competitiveness going
forward. However, the JVs reported contribution margin (ex variable expenses) of 1.6% only
versus 37-39%, probably due to high outsourcing, suboptimal scale etc. We expect the difference
in contribution margin to narrow as L&T scales up, gains on the learning curve and reaches higher
levels of indigenization while on the other hand, keen competitors drag down contribution margin
for competition. We do understand the difficulties in concluding from the above comparison as
L&T-MHI JVs’ revenues and margin may have not stabilized, and the peers may have other lines of
business such as EPC execution, exports and other equipment etc.
Much smaller gross block (esp. boiler) versus other players - a part possibly in L&T standalone
We highlight that the L&T-MHI BTG JVs operate at a relatively lower gross block versus the capex
envisaged by other new players. The JVs reported a gross block of Rs8 bn (end-Mar-11) skewed
towards the turbine/generator JV (Rs2.8 bn gross block for boiler JV). This is relatively lower versus
the Rs44 bn capex highlighted by BGR (for full BTG) and Rs7 bn for Thermax (only for boilers). We
believe that a part of the L&T’s capital expenditure (facilities for manufacturing auxiliaries such as
forgings, piping, fans etc) for BTG venture could be included within the parent/other subsidiaries
and are being built in separate subsidiaries or in the standalone entity.
Sizeable equity investments already made by new players; physical progress may be slow
We also cite the infusion of considerable equity by new players into equipment ventures. The L&THitachi
combine has itself invested about Rs4.7 bn of equity as of end-Mar-11. BGR and Hitachi
have also invested Rs1.8 bn in their BTG JVs with Thermax/Babcock, having put in Rs965 mn in
their supercritical boiler JV. Despite such investments, physical progress may be slow based on
delays in the award of NTPC bulk tenders.
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