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India Equity Research Reports, IPO and Stock News
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http://content.icicidirect.com/mailimages/ICICIdirect_LarsenToubro_InitiatingCoverage.pdf
T h e B e h e m o t h…
Larsen & Toubro‘s (L&T) ability to increase its order backlog consistently
despite a weak investment cycle (42% YoY growth during last crisis
phase of FY10 and 27% as on 9MFY12) showcases the company’s
robust fundamentals. A diverse presence across segments and
geographies, a strong balance sheet, reliability in execution and ability
to monetise the revival in investment cycle ensure that L&T is well
placed to meet its FY12E revenue guidance of 25% YoY in an
environment where its peers are facing declining order backlog and
volatility in earnings. Coupled with this, value unlocking in subsidiaries,
would offer huge upside potential as L&T has invested about | 7400
crore in various strategic subsidiaries, which have the capability to
provide huge back ended IRRs on equity. We believe L&T remains the
preferred bet in the capital goods space. We advise buying the stock on
steep declines as a huge run up will cap upside in the short-term.
Best placed to weather capex cycle downs and monetise the ups...
The investment cycle is going through a turbulent phase as capex
decisions are moving at a snails pace. However, we believe L&T has done
a commendable job in maintaining a flattish order inflow for 9MFY12 on a
high base (we have built in ~8% decline in FY12E order inflows). L&T
commands a robust book-to-bill ratio of 2.9x as of Q3FY12. Therefore, this
lends credence to our assumptions that L&T will be able to meet its FY12E
revenue target. We have been a tad conservative on the assumptions and
have modelled in 23% YoY revenue growth for FY12E. Going ahead,
given the decline that L&T has witnessed in order inflows, we believe the
company can still achieve ~17% and 10% CAGR in revenues and PAT
over FY11-14E, respectively.
Subsidiaries: Storehouse of tremendous potential…
L&T invested | 7400 crore into various subsidiaries spanning across
various sectors and segments. Investments in subsidiaries have grown at
a CAGR of 43% (low base) over FY08-11. Going ahead, as various
projects near their completion phase, we expect investments to grow at
20% CAGR over FY11-14E to | 13063 crore. Reaching a critical mass level
(revenues) would trigger value unlocking. The process has taken off
gradually as L&T Finance Holdings came out with an IPO in FY12.
Valuations
We have valued L&T on a sum of the parts methodology and arrived at a
fair value of | 1473/share in our base case scenario. The base business
remains the key contributor to valuations (~80%). Going ahead, a rerating/decline of P/E will be highly dependent on the order inflow outlook
in FY13E, which, in turn, will drive valuations. Also, listing of any
subsidiary can provide further impetus to value creation. Initiate with Hold
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_LarsenToubro_InitiatingCoverage.pdf
T h e B e h e m o t h…
Larsen & Toubro‘s (L&T) ability to increase its order backlog consistently
despite a weak investment cycle (42% YoY growth during last crisis
phase of FY10 and 27% as on 9MFY12) showcases the company’s
robust fundamentals. A diverse presence across segments and
geographies, a strong balance sheet, reliability in execution and ability
to monetise the revival in investment cycle ensure that L&T is well
placed to meet its FY12E revenue guidance of 25% YoY in an
environment where its peers are facing declining order backlog and
volatility in earnings. Coupled with this, value unlocking in subsidiaries,
would offer huge upside potential as L&T has invested about | 7400
crore in various strategic subsidiaries, which have the capability to
provide huge back ended IRRs on equity. We believe L&T remains the
preferred bet in the capital goods space. We advise buying the stock on
steep declines as a huge run up will cap upside in the short-term.
Best placed to weather capex cycle downs and monetise the ups...
The investment cycle is going through a turbulent phase as capex
decisions are moving at a snails pace. However, we believe L&T has done
a commendable job in maintaining a flattish order inflow for 9MFY12 on a
high base (we have built in ~8% decline in FY12E order inflows). L&T
commands a robust book-to-bill ratio of 2.9x as of Q3FY12. Therefore, this
lends credence to our assumptions that L&T will be able to meet its FY12E
revenue target. We have been a tad conservative on the assumptions and
have modelled in 23% YoY revenue growth for FY12E. Going ahead,
given the decline that L&T has witnessed in order inflows, we believe the
company can still achieve ~17% and 10% CAGR in revenues and PAT
over FY11-14E, respectively.
Subsidiaries: Storehouse of tremendous potential…
L&T invested | 7400 crore into various subsidiaries spanning across
various sectors and segments. Investments in subsidiaries have grown at
a CAGR of 43% (low base) over FY08-11. Going ahead, as various
projects near their completion phase, we expect investments to grow at
20% CAGR over FY11-14E to | 13063 crore. Reaching a critical mass level
(revenues) would trigger value unlocking. The process has taken off
gradually as L&T Finance Holdings came out with an IPO in FY12.
Valuations
We have valued L&T on a sum of the parts methodology and arrived at a
fair value of | 1473/share in our base case scenario. The base business
remains the key contributor to valuations (~80%). Going ahead, a rerating/decline of P/E will be highly dependent on the order inflow outlook
in FY13E, which, in turn, will drive valuations. Also, listing of any
subsidiary can provide further impetus to value creation. Initiate with Hold
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