Larsen & Toubro -- Value Unlocking at L&T IDPL? :: Morgan Stanley

Larsen & Toubro
Quick Comment: Value
Unlocking at L&T IDPL?


No impact on our views, based on the current
information: We would wait for more clarity on this
news. We know what the foreign investor might be
looking to put into L&T IDPL (Rs20 bn +) – but the stake
that IDPL is likely to hand out for it is not yet known.
Hence, it is not possible to judge the impact of the deal.
 If the stake ends up at less than 20%, then there
would be upside risk to our target price.
 If the stake is higher than 20%, then there would be
downside risk.
On a probability-weighted basis, at Rs110/share (Rs101
bn), IDPL is around 12% of our target price for L&T
(Exhibit 3) – the biggest chunk after the core business.
We remain on the sidelines pending more visibility
on the revival of Indian capex: An exceptional
long-term story and strong management are being offset
by near-term challenges – both macro and micro.
The first step in management’s vision – delinking
IDPL’s growth from L&T’s balance sheet: On Friday,
L&T informed the exchanges that L&T IDPL (the
subsidiary housing its infrastructure development
business) has submitted an application to the Foreign
Investment Promotion Board (FIPB) for approval of a
foreign direct investment. Due diligence is yet to be
completed and some terms of the transaction still have
to be agreed upon – but according to the company, the
investor is looking to put in an initial Rs10 bn, followed
by another Rs10bn or more in the next 12 months.
Over the next five years (F14-18e), IDPL estimates an
equity requirement of Rs82 bn (Exhibit 1), with ~75%
needed for projects now on hand. Our meeting with
IDPL management in September 2013 (for details, see
our QC of September 23) had indicated that the
company planned to raise 60% of the money from
monetization (including securitization) and 40% from
bringing equity investors into both IDPL and the
Hyderabad metro (mezzanine equity).

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Dhamra up next: Given L&T’s plans to raise Rs49 bn over the
next five years through monetization (over and above the
Rs10.8 bn of funds from monetization of Bangalore airport, two
roads and one port already reinvested in the business over the
last few years), this is the key thing to watch. Dhamra Port
(L&T’s 50:50 JV with Tata Steel) has been in the news for a
while as being a candidate for monetization. IDPL
management had confirmed in our September 2013 meeting
that the fund raising plan contains potential proceeds of Rs9 bn
from that asset

Valuation Methodology
We continue to use a sum-of-the-parts methodology for our
determining the base, bull and bear case scenario values for
the company, and then use a probability-weighted method to
come to our price target. With policy action having started up
after a long hiatus, since September 2012, and the economy
having bottomed out, we continue to assume a somewhat
higher probability for our bull case (20%), than for the bear
case (10%).



L&T – Sum of the Parts
(in Rs / Share) Bull Case Base Case Bear Case Base Case Methodology
Core Business 1,062 606 408 RI Model, COE = 15.3%
Infotech 41 41 41 20% discount to Peer PE Multiple
IDPL 146 106 70 1x P/B on invested equity + 0.5x on uninvested equity
Finance 94 71 71 40% discount to currrent market price
Super Critical JV 56 47 15 FCFE, COE = 15.3%
Price 1,400 871 604
Weights 20% 70% 10%
Target Price 950
Current Price 1,061
Upside / (Downside) -10%
Source: Company Data, Morgan Stanley Research