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Lasrsen and Toubro
We visited the Heavy Engineering and Electrical Business plants at L&T's
flagship Powai facility.
A view from the shopfloor: At the shopfloor level we could see several overseas
orders under execution and in terms of sector exposure mostly fertilizer orders were
underway. The plant managers informed us that both the electrical and heavy
engineering units were running at >100% utilization level. An influx of new orders
would be executed at their Vadodara and Coimbatore plants where they have some
headroom. Hence we could infer that the sector would probably be running at 80-
85% utilization levels and corporates have not undertaken large capacity additions
given the high interest rates.
The shopfloor of the electrical unit was buzzing with activity which is a good
indicator of short lead demand. Also the plant manager told us that the level of
outsourcing has increased off late with the increase in demand, but pricing remains
an issue due to competitive intensity. The positive signal on demand is a good
indicator for Siemens India as well (JPM Rating OW).
According to management, over the next 5-7 years majority of the workforce at the
Powai plant will reach superannuation and work will be diverted to Hazira and
Coimbatore. Also the Powai plant being located in the congested city of Mumbai has
logistical bottlenecks as well. L&T now owns the land at the entire site.
Focus on order flow targets: We also met with management and the key areas of
concern focused on the ordering activity both at a macro level and for L&T.
According to L&T, $40B of ordering activity is expected in the 2HFY12 of which
L&T is targeting $10B to meet its guidance of a 5% yoy growth in FY12.
Road sector ordering is back, with less competition: Competitive intensity
although still very much prevalent has come off in the last couple of months and
numbers of bidders per project has been down to 19 odd vs 30+ earlier. Also about
47 road concessions are up for sale in the market, given traffic numbers have turned
out to be well below possibly over optimistic expectations. L&T continues to be
cautious in its selection, winning probably one out of every 10 projects.
Some positive comments were made on the $17B Dedicated Freight Corridor
project: Land acquisition is underway and financing milestones have been
completed. Japanese banks are funding the project at 20bps interest rate with a 20
years moratorium and 30 year repayment period. Also the World Bank is providing
some funding. According to management 3 consortiums have been shortlisted so far
(of 31 Indian and 6 Japanese bidders) including L&T. However the Govt could be
inviting more RFQs to stimulate more competition.
Metros to contribute, power to be weak: Also metros could see some decent
ordering, while challenges in power continue to remain. For the Hyderabad Metro
(~5% of OB), 45% of land acquisition is pending, meanwhile L&T will execute the
design portion of the order. While L&T lost out on the NTPC bulk tender, if BHEL
chooses not to match L1 then L&T would be in the fray for 4X800MW boilers and
3/2X800MW TG sets.
Working capital stress: Like 2Q where we saw some stress on working capital, the
issue could be prolonged for sometime since L&T is now paying its vendors earlier
which cannot bear the increased financing costs
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Lasrsen and Toubro
We visited the Heavy Engineering and Electrical Business plants at L&T's
flagship Powai facility.
A view from the shopfloor: At the shopfloor level we could see several overseas
orders under execution and in terms of sector exposure mostly fertilizer orders were
underway. The plant managers informed us that both the electrical and heavy
engineering units were running at >100% utilization level. An influx of new orders
would be executed at their Vadodara and Coimbatore plants where they have some
headroom. Hence we could infer that the sector would probably be running at 80-
85% utilization levels and corporates have not undertaken large capacity additions
given the high interest rates.
The shopfloor of the electrical unit was buzzing with activity which is a good
indicator of short lead demand. Also the plant manager told us that the level of
outsourcing has increased off late with the increase in demand, but pricing remains
an issue due to competitive intensity. The positive signal on demand is a good
indicator for Siemens India as well (JPM Rating OW).
According to management, over the next 5-7 years majority of the workforce at the
Powai plant will reach superannuation and work will be diverted to Hazira and
Coimbatore. Also the Powai plant being located in the congested city of Mumbai has
logistical bottlenecks as well. L&T now owns the land at the entire site.
Focus on order flow targets: We also met with management and the key areas of
concern focused on the ordering activity both at a macro level and for L&T.
According to L&T, $40B of ordering activity is expected in the 2HFY12 of which
L&T is targeting $10B to meet its guidance of a 5% yoy growth in FY12.
Road sector ordering is back, with less competition: Competitive intensity
although still very much prevalent has come off in the last couple of months and
numbers of bidders per project has been down to 19 odd vs 30+ earlier. Also about
47 road concessions are up for sale in the market, given traffic numbers have turned
out to be well below possibly over optimistic expectations. L&T continues to be
cautious in its selection, winning probably one out of every 10 projects.
Some positive comments were made on the $17B Dedicated Freight Corridor
project: Land acquisition is underway and financing milestones have been
completed. Japanese banks are funding the project at 20bps interest rate with a 20
years moratorium and 30 year repayment period. Also the World Bank is providing
some funding. According to management 3 consortiums have been shortlisted so far
(of 31 Indian and 6 Japanese bidders) including L&T. However the Govt could be
inviting more RFQs to stimulate more competition.
Metros to contribute, power to be weak: Also metros could see some decent
ordering, while challenges in power continue to remain. For the Hyderabad Metro
(~5% of OB), 45% of land acquisition is pending, meanwhile L&T will execute the
design portion of the order. While L&T lost out on the NTPC bulk tender, if BHEL
chooses not to match L1 then L&T would be in the fray for 4X800MW boilers and
3/2X800MW TG sets.
Working capital stress: Like 2Q where we saw some stress on working capital, the
issue could be prolonged for sometime since L&T is now paying its vendors earlier
which cannot bear the increased financing costs
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