JPMorgan:: Larsen & Toubro :: Eyeing international opportunities to overcome domestic deficit

In our meeting with L&T management, we sensed skepticism on the domestic
capex cycle and focus on ramping up share of international business. As per
management, a fresh investment pickup in domestic thermal generation will
take another two years. In the near term, India road sector outlook remains
muted (though past the bottom, in our view). Domestic B&F and T&D
inflows for L&T in FY14E are likely to be flat on a high base in the current
fiscal year. The hydrocarbons space continues to be very competitive, as per
management. These inputs serve to corroborate our views (see our 5th Mar
report). The international opportunity that L&T is eyeing assumes more
significance than ever before, given likely delays in recovery of the domestic
capex cycle.
 L&T in consortium with international players has placed bids for a
portion of ~US$30B of Middle East infrastructure projects, we estimate
L&T's share of the bid opportunity at US$3.5B. L&T has bid for two
metro projects (Doha & Riyadh - US$7-8/B each), the Etihad railway
project (US$11B) connecting all the seven Emirates and a 265km road
project in Oman (~US$2.6B) as part of international consortiums. The
number of bidders goes up to 10-15 for the road and railway projects,
whereas the metro projects have 4-8 pre-qualified consortia with more
members (see details inside the report). As per L&T, EBITDA margins on
the Middle East infra projects could typically be 200bps lower than similar
projects in India.
 Making the best of the domestic deficit, but paying for deferment of
opportunities. L&T is a part of one of the two consortiums that have been
pre-qualified for the first package (US$1.2-1.4B) of the western freight
corridor. L&T continues to maintain its positive stance on the metro rail
opportunity in India. We expect a substantial portion of Delhi Metro-III
(US$6.5bn) and Kochi metro (US$1bn) to be awarded through FY14.
Deferment of domestic order opportunities in defense and nuclear, come at
a cost for L&T. Recently commissioned Katupalli shipyard and Hazira
forging unit involved combined capex of ~US$800mn and could remain
underutilized adding to interest burden at consolidated level.
 Near term, we expect fresh order announcements: With only ~Rs34bn
orders reported so far in Mar-q, time is running out for L&T to inspire
confidence in traditionally strong Mar-q inflows (Rs230bn JPM est).

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