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Larsen & Toubro Ltd.- Transformation into Infra Developer - boon or bane?
�� Where we are
L&T is India's largest E&C firm offering exposure to an entire capex cycle.
Through its subsidiaries and JVs, it is focusing on a diverse range of products &
services and several BOOT projects to get contracts for EPC business and
potential value creation via divestments. Its infra development, financial, and
software subsidiaries have begun to grow rapidly as well. 1HFY11 order inflows
were up +29%YoY on captive orders from its own subs, while external orders
remains weak (fell 2%) with slippages seen in oil & gas (ONGC, GSPC), roads
and defense (shipyard). Also power orders from IPPs have slowed with delay in
imposition of import duty. Backlog is at Rs1.15tn, +41%YoY.
Where we are going
Change in India's capex to PPP model has forced L&T to transform into an infra
developer – a less volatile but a high capex, long gestation, and annuity driven
model vs a low capex, high RoE and volatile E&C business. To achieve this, L&T
has embarked on a Rs570bn capex infra development business led by Power
(Rs157bn), Metro rail (Rs150bn), and roads (Rs132bn), which is >2x the size of
L&T’s current balance sheet. Potential large medium-term prospects are:
a) NTPC 9x800MW BTG order, b) midget submarine order of US$4bn for set a of
six submarines, c) direct offset of 50% from fighter aircraft purchase by India
worth US$12bn, d) NMDC 3mtpa steel plant and, and e) 2x800MW captive order
from its JV with Karnataka genco.
Backlog at Rs1.15tn (+41%YoY) to drive EPS CAGR of 31% (FY11-13E) and
creation of growth vehicles in power equipment, shipyard, defense, nuke,
aerospace domains, and infra concession wins drive our Buy. Asset growth in
subsidiary L&T Finance at c.+50%YoY to improve marketability on likely IPO in
2HFY11. Entry into general insurance should complete finance portfolio. Capex in
lower RoE projects Rajpura Power, Hyderabad Metro etc. are key risks and
potential de-rating catalysts.
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