TP: INR1,696 for Larsen & Toubro Buy:: Motilal Oswal

The RoE troika
Key RoE triggers – Doubling of market share, focus on asset turn
 L&T's consolidated RoE has deteriorated significantly from 31% in FY07 to 17% in
FY12. Correcting the capital structure and improving RoEs are important objectives.
 However, 'RoE improvement' is easier said than done, especially for a conglomerate
like L&T. It requires serious commitment and disciplined action, more so in a period
when the macro environment continues to be challenging.
 We believe that the roadmap towards meaningful improvement in RoE would be led
by the following:
1. The new manufacturing business coupled with exposure to several geographies/
segments would provide impetus to further double its market share, a key trigger
for RoE improvement.
2. Investments in subsidiaries at 48% of IC, future strategy will entail a mixed approach:
i) Manufacturing businesses: Attempt will be to defend its investments, given
the long-term growth potential, sacrificing near-term return ratios
ii) Infrastructure development: Attempt will be to monetize the assets and churn
the portfolio
iii) Service businesses (IT, Finance, etc): Focus will be to build scale
 VALUATION & VIEW: We expect L&T to report standalone revenue CAGR of 15% and
PAT CAGR of 10% over FY12-14; consolidated PAT CAGR would be 8%. We maintain Buy
with a revised SOTP-based target price of INR1,696 (up from INR1,670). We have
valued LT standalone at 15x FY14EPS and subsidiaries at INR465/share.

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Motilal Oswal 8th Annual Global Investor Conference 2012
CEO Track takeaways
Core essence
 Lakshya 2016 targets revenues of INR1,000b by FY16, from current levels of
INR620b. This will be driven by increased contribution from overseas business
to 25% (up from 15% now) and new manufacturing businesses (defense INR65b,
ship-building INR40b, deepwater rigs INR35b, etc).
Industry insights
 High growth sectors include Power, Hydrocarbons and Steel.
 In the power sector, the issue of coal availability is moving in a positive direction.
Many state utilities have also started to raise tariffs. However, sustained ordering
in power sector still looks 2 years away. Fukushima event has pushed back nuclear
capacity addition by 2 years, but investment in solar capacity is picking up as cost
of setting up a plant has reduced to INR1b/MW. Hydel capacity remains sluggish.
 Domestic E&P spend is picking up while refinery and petroleum capex remains
sluggish. Investment in fertilizer capacity is dependent on new Urea Investment
policy and availability of gas. In the global markets, Middle East, South Eastern
region, Australia and CIS countries continue to show increasing investments.
Globally, offshore oil E&P is moving towards deeper water.
 Domestic ferrous segment continues to slow down due to ban on iron ore mining
in Karnataka; non-ferrous capex is also sporadic.
 L&T is attractively positioned in many of these segments. In the infrastructure
segment, metro rails and DFCC are major growth drivers. Road project orders by
NHAI have slowed down, but there are some prospective orders in the Airports
segment. Urban Infra is showing healthy traction driven by investment in
hospitals and water treatment.
Key triggers/challenges
 The current phase of slowdown in domestic business is a wake-up call and the
attempt going forward is not to depend on any single economy for growth.
Hence the process of internationalization will accelerate now and the target is
to increase the share of international business to 25% by 2016 from 15% currently.
 Correcting the capital structure is an important priority, and is being targeted
through portfolio rationalization (hiving off businesses which cannot achieve a
critical size), value unlocking (target at least 4 listed companies by 2020) and
asset monetization / churn.
 One of the important objectives is to make L&T asset light going forward


Maintain Buy with target price of INR1,696
We expect L&T to report standalone revenue CAGR of 15% and PAT CAGR of 10% over
FY12-14; consolidated PAT CAGR would be 8%. We estimate consolidated EPS at INR85
(up 9%) for FY13 and INR91 (up 7%) for FY14. We maintain Buy with a revised SOTPbased
target price of INR1,696 (up from INR1,670). We have valued L&T standalone at
15x FY14E earnings and subsidiaries at INR465/share