Larsen & Toubro :Integrated player in power segment value chain:: Motilal oswal

Integrated player in power value chain
L&T Power offers turnkey solutions for up to 1GW super critical coal-based
power plants, and has also demonstrated capability of executing BOP packages
for both subcritical and supercritical thermal projects on EPC basis. We believe
that integration in the value chain is the key competitive advantage; also given
the increasing trend of a large number of projects being awarded on EPC basis.

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BTG Manufacturing: FY16 improvement to be led by strong leverage
During FY13, BTG business reported net profit of INR520m, and is
commendable given that the capacity utilization stood at sub-50%. The
improved performance is also being led by the fast tracked indigenization
program, with current levels at ~80-85% for boilers and ~60% for turbines.
Given the possible pick up in power generation project awards, we expect
revenues to increase 35% during FY16E/FY13 and net profit at INR2.2b in FY16.
Tapping opportunities globally and also spares and services in India
L&T-MHI BTG manufacturing unit in Hazira is part of the MHI global network,
and thus would be a beneficiary of the outsourcing possibilities by MHI for its
global requirements. L&T MHI Boilers is also looking for opportunities to make
inroads for operational spares for pressure parts and coal pulverizers in the
Indian market. We understand that, going forward, adding capabilities in
Repairs and Maintenance and Operations of power plants will be an important
growth driver.
Maintain Buy, but risk-reward increasingly skewed
For L&T, we expect consolidated earnings CAGR of 6.4% during FY13-16E, and
the muted growth is largely a reflection of: i) expectations of margin pressures
in E&C business from 12% in FY13 to 10.8% in FY16 given possibility of increased
competitive intensity, adverse project mix towards government contracts and
also higher contribution of overseas revenues (at 23% in FY16, vs 19% in FY13),
and ii) increased losses from asset development portfolio, at INR8b in FY16E vs
INR3.7b in FY13. Maintain Buy, with revised SOTP based price target of
INR1,186/sh, as we roll over to FY16E.
L&T is a strong play on the recovery in the investment climate, and hence the
recent stock price rally is largely led by expectations of a decisive election
mandate. Given the dependence on mega Greenfield projects for the next level
of growth trajectory, we believe that a large part of L&T’s business model
depicts characteristics of a mid to late cyclical recovery. Asset monetization is
an important near term stock driver