L & T:: TP: INR1,734 Buy: Overseas juggernaut: 1.5-2% market share in ME ::Most

Overseas juggernaut: 1.5-2% market share in ME
Circumspect about nature of project wins, near-term margins at risk
 Since our thematic report on Larsen and Toubro (LT), 'Gearing up the overseas
juggernaut' in November 2012, the overseas business is now expected to contribute
39% of consolidated earnings in FY14E (v/s 32% earlier).
 Initial success has been encouraging, with LT being part of the pre-qualified bidding
consortiums in metro, railway, road and hydrocarbon projects. Possible order intake
of INR200b in FY14E from the overseas markets will entail a market share of ~1.5-2%
in Middle East ordering (based on recent aggregate ordering trends).
 We remain circumspect about profitability in overseas orders due to likely poor fixed
cost absorption and learning curve, associated with new geographies/ segments.
 Maintain Buy and believe triggers still exist to accumulate the stock on declines.

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E&C Business: Two-pronged growth strategy for overseas markets
 Increased geographical penetration: LT, well-established in Oman and UAE,
is consolidating its presence in Kuwait, Qatar and Saudi Arabia. New focus
markets are Iraq, Indonesia, CIS, Perth, Brazil, Australia etc.
 Increased segmental penetration: For infrastructure sector, apart from
airports (where LT's presence in Middle East has been established), attempt
is to bid for larger sized projects in urban transport (metros, railways,
expressways etc). In hydrocarbons, the organization structure has been
altered and local expats have been appointed in important locations.
Initial success encouraging, yet to reflect in reported 'order wins'
 Urban transport: Company achieved pre-qualifications (part of consortium)
for two metro projects (Doha and Riyadh metro rail, USD7-8b each), Etihad
rail (USD11b), a road project in Oman (~USD2b) etc.
 Hydrocarbons: LT had witnessed initial success with total orders of ~USD500-
600m from Abu Dhabi and Oman in the last 18-24 months. Also, it received
two orders of USD100m each from Thailand/Myanmar in 1QFY12/3QFY13,
while recent media reports indicates that the company emerged as the
lowest bidder for USD800m contract from Saudi Aramco for the Midyan field.


Maintain Buy
LT is exposed to several levers across business/geographic segments and has emerged
as the E&C partner of choice in India, which provides a robust foundation to capitalize
on the next leg of investment cycle. Hence, despite a very strong near term
performance, we remain positive on L&T and believe triggers still exist to accumulate
the stock on declines.