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  • 7/28/2019 India Construction - Mar12 - BNP Paribas[1]

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    PREPARED BY BNP PARIBAS SECURITIES ASIATHIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. I

    SECTOR REPORT

    EQUITIES RESEARCH

    INDIA

    INDIA CONSTRUCTION

    NEUTRALINDUSTRY OUTLOOK

    One swallow doesntSUMMARYCautiously optimistic on recent developm

    We remain cautiously optimistic after some of thcut over the last nine months. However, several i

    ironed out before we turn positive on the sector:supply issues for the power sector, 2) lowering oacquisition and 4) expediting environmental clea

    OUTLOOKSeveral hurdles still remain

    Key forthcoming catalysts that could have a signioutcomes of assembly elections in five states; 2)

    3) budget for the next year. Additionally, inflowscould also result in a re-rating of these names.

    VALUATIONValuations attractive, but stick to quality

    We think that valuations for each of the companione standard deviation from the mean). Howeveclear leader in the space, Larsen & Toubro. Larse

    or: 1) quality of order book; 2) diversity of orderstrength; and 4) best-in-class execution capabilitof INR1,500 is comprised of the standalone compINR1,235 and subsidiary contribution of INR265.

    Vishal Sharma, CFAvish[email protected]

    +91 22 33704377

    Shasshash

    +91 2

    BNP Paribas Securities (Asia) Ltd. research is available on Thoour salesperson for authorisation. Please see the important n

    PORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPEN

    BNPP RECOMMENDATIONS

    CompanyBBG

    CodeR

    Simplex Infra SINF INLarsen & Toubro LT IN

    NCC Ltd NJCC IN

    IVRCL Ltd IVRC IN

    Punj Lloyd PUNJ IN RE

    ake spring

    nts

    policy changes and CRRssues still need to be

    1) resolution of the fuelkey policy rates, 3) landances.

    ficant impact: 1)BI monetary policy; and

    into equities (e.g. LTRO II)

    es are attractive (below, we put our faith in the

    & Toubro is our top pick

    ; 3) balance sheeties. Our SoTP-based TPanys contribution of

    hank [email protected]

    2 33704336

    son One, Bloomberg, TheMarkets.com, Factset and on http://eqreseotice on the inside back cover.

    TOP STOCK PI

    Company

    BBG Code

    Share Price

    Target Price

    1 Year - high

    1 year - low

    VALUATION SU

    Company

    Simplex Infra

    Larsen & Toubro

    NCC Ltd

    IVRCL Ltd

    Punj Lloyd

    MAJOR CHANG

    Company

    IVRCL Ltd

    NCC Ltd

    Source: BNP Paribas

    931

    1,131

    1,331

    1,531

    1,731

    1,931

    Mar-11 Jun-11

    (INR) Larsen & T

    IX

    atingSharePrice

    TargetPrice

    Upside /Downside

    BUY 223.70 272.00 +22%BUY 1,266.75 1,500.00 +18%

    OLD 59.80 59.00 -1%

    OLD 53.65 53.00 -1%

    UCE 54.00 47.00 -13%

    rch.bnpparibas.com/index. Please contact

    6 MARCH 2012

    K

    Larsen & Toubro

    LT IN

    1,266.75

    1,500.00

    1,863.45

    977.70

    MMARY

    P/E (x) Yld (%)

    FY1 FY2 FY2

    13.7 8.0 1.0

    18.3 15.9 1.2

    27.0 12.5 2.1

    17.8 11.7 1.1

    37.7 11.1 0.6

    ES

    From BUY HOLD

    From BUY HOLD

    (33)

    (23)

    (13)

    (3)

    7

    17

    Sep-11 Dec-11 Mar-12

    (%)oubro Rel to MSCI India

    http://equities.bnpparibas.com/http://equities.bnpparibas.com/http://equities.bnpparibas.com/
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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    CONTENTS

    Signs of improvement coupled with liquidity led to rally __________________________________________ 3

    Softening interest rates will be key _________________________________________________________________________________ 3

    Baby steps in the right direction anecdotal evidence ____________________________________________ 5Power _________________________________________________________________________________________________________ 5

    Environmental issues ____________________________________________________________________________________________ 5

    Airport ________________________________________________________________________________________________________ 5

    3QFY12 performance execution picked up but profitability was a key concern ______________________ 6

    Two downgrades, four TP changes and some estimates tweaked _________________________________________________________ 7

    Historical financials A snapshot ______________________________________________________________ 7

    Valuation ______________________________________________________________________________________________________ 9

    Company reports ___________________________________________________________________________ 11

    Please see India Research Team list on page 43.

    To find out more about BNP Paribas Equities Research:

    Visit :http://eqresearch.bnpparibas.com/ For ipad users : http://appstore.apple.com/BNPP-equities/

    2

    http://eqresearch.bnpparibas.com/http://eqresearch.bnpparibas.com/http://appstore.apple.com/BNPP-equities/http://appstore.apple.com/BNPP-equities/http://eqresearch.bnpparibas.com/
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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Signs of improvement coupled with liquidity led to rally

    Although the on-the-ground situation in terms of the fundamental positions of companies in the sector hasnot materially changed, there is anecdotal evidence of small, encouraging steps taken by policy makershaving led to positive sentiment, resulting in a stock rally. To top these developments, RBIs gesture oneasing interest rates added to the positive sentiment. In our note Play on the interest rate (5 September2011), we suggested playing the interest rate cycle through a basket of construction stocks, and highlightedthe strong correlation between relative valuations of the sector and Sensex/short-term interest rates.

    Softening interest rates will be key

    We reiterate our finding that approximately 45% of the expansion in P/E multiples for construction namescan be explained by the change in interest rates with a four-month lag. Please refer to Exhibit 1 for themovement in 12-month commercial paper rates and the relative P/E of the sector (vs the Sensex).

    EXHIBIT 1: Interest rates vs relative sector P/E

    Sources: Bloomberg; BNP Paribas

    EXHIBIT 2: RBI Policy statement on 16 December 2011

    While Inflation remains on its projected trajectory, downside risks to growth have clearly increased. Theguidance given in the SQR was that, based on the projected inflation trajectory, further rate hikes might notbe warranted. In view of the moderating growth momentum and higher downside risks to growth, thisguidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle,responding to the risks to growth.

    Source: RBI

    EXHIBIT 3: Stock performance

    Sources: Bloomberg; BNP Paribas

    0.5

    0.7

    0.9

    1.11.3

    1.5

    1.7

    1.9

    2.1

    2.3

    2.50

    2

    4

    6

    8

    10

    12

    14

    16

    Jul-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12

    (x)(%)Interest rates (LHS)

    Industry P/E divided by Sensex P/E (RHS)

    Ex LT (RHS)

    R-Squared of 45% with a 4m lag

    4

    (20)

    33

    (14)

    (3)

    (60)

    (40)

    (20)

    0

    20

    40

    60

    80

    6-Sep 20-Sep 4-Oct 18-Oct 1-Nov 15-Nov 29-Nov 13-Dec 27-Dec 10-Jan 24-Jan 7-Feb 21-Feb

    (%) SENSEX LT PUNJ IVRC NJCC SINF

    Average+24% outperformanceAverage-21% underperformance

    3

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    EXHIBIT 4: Price performance 4 Sep-15 Dec 2011 EXHIBIT 5: Price performance 16 Dec 2011-27 Feb 2012

    Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas

    Exhibits 4 and 5 compare price performance of our coverage universe up to 15 December 2011; when theReserve Bank of India, as part of its policy announcement, softened its hawkish stance on interest rates and

    indicated in its guidance that further rate hikes may not be warranted.

    (5)

    (30)(32)

    (8)

    (40)

    (20)

    (50)

    (40)

    (30)

    (20)

    (10)

    0

    10

    20

    30

    6-Sep 20-Sep 4-Oct 18-Oct 1-Nov 15-Nov29-Nov 13-Dec

    (%) SENSEX LT PUNJ

    IVRC NJCC SINF

    13

    32

    63

    49

    22

    (20)

    0

    20

    40

    60

    80

    100

    120

    16-Dec 30-Dec 13-Jan 27-Jan 10-Feb 24-Feb

    (%) SENSEX LT PUNJ

    IVRC NJCC SINF

    4

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Baby steps in the right direction anecdotal evidence

    Over the past nine months, we have noticed small steps being taken by authorities in different segmentsthat we believe are steps in the right direction. A brief compilation is presented below:

    Power

    The Appellate Tribunal (AT) passed asuo moto directive to all State Electricity Regulators asking them toimplement power tariff hikes in their respective states even if the State Electricity Boards (SEB) do not file

    for a rate revision. The SEBs have been in a bad financial position because of aggregate technical andcommercial losses and expensive power (due to higher fuel costs). Further, they have not been able to passthese costs on, in the form of higher tariffs, due to political compulsion. Therefore, we believe thissuo motoaction by the AT is something to take note of and can be considered as a positive step by the regulator.After this move, two major states went for rate hikes.

    Tariffs pertaining to industrial consumers have been de-regulated. This development encourages bilateralcontracts between industrial consumers and IPPs. Most IPPs have been reporting lower-than-optimumcapacity utilisation due to lower (or no) fuel supply or high cost of fuel. Since this development, if the IPPsare able to negotiate slightly higher tariffs with industrial consumers in return for a guaranteed and stablesupply of power, projects could still be viable if they are able to import fuel (coal or gas) and combine itwith their domestic supplies.

    Coal India [COAL IN] has been directed to sign fuel supply agreements with power plants that have enteredinto long-term PPAs with power distribution companies and that have been commissioned, or will getcommissioned, on or before 31 March 2015. For power plants that have been commissioned up to 31December 2011, FSAs will be signed before 31 March 2012. The FSAs will be signed for the full quantity ofcoal mentioned in the Letters of Assurance (LoAs) for a period of 20 years with a trigger level of 80% for levyof disincentive and 90% for levy of incentive. In case of any shortfall in fulfilling its commitment under theFSAs from its own production, Coal India Limited will arrange for supply of coal through imports or througharrangement with State/Central PSUs who have been allotted coal blocks. The proposed course of actionhas been approved by the Prime Minister. These arrangements would provide relief to power plants withestimated capacity of more than 50,000MW.

    Environmental issues

    In November 2011, the Environmental Ministry gave clearance to the first phase of Lavasa, a landmark

    township development project (probably the only project of its kind), majority-owned by HindustanConstruction [HCC IN]. We like the way this clearance was granted. Most bureaucrats in the presentenvironment of cracking down on corruption are extremely cautious of passing any order. However, in thiscase, there were three parties involved the Central Ministry, the State Ministry and the Mumbai HighCourt who solved this issue together and no single entity took the onus of passing the order.

    Certain other large projects have been put on fast track. Potential beneficiaries are Jindal Power (JSP IN),Hinduja Power (unlisted), and L&T (LT IN).

    Airport

    The airport regulator allowed the resumption of the collection of a development fee at Delhi airport after asix-month long stay issued by the High Court. Earlier, due to protests and a suit in the Delhi High Court, thecollection of an airport development fee (DF) had been stayed by the High Court. After six months of

    paperwork and red-tape, the collection of DF was restored, beginning 1 December 2011. This DF was beingused to partly fund the capex of Delhi airport.

    In the latest development, the regulator released a consultation paper removing uncertainties about theDelhi revenue model. This was something that the regulator was supposed to pass last year.

    5

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    3QFY12 performance execution picked up but profitability was a key concern

    During 3QFY12, most companies reported a drop in EBITDA margin primarily attributable to anticipatedlosses or cost overruns on projects under execution. In certain cases, the loss recorded or decline in EBITDAmargin has been very significant. For instance, HCC had included a INR1.67b loss due to this in its quarterlyresults. NCC had also accounted for INR150m of write-offs of certain advances/receivables. Punj Lloyd[PUNJ IN] incorporated certain losses due to de-consolidation of Simon Carves after the latter went intoliquidation. Stocks of these companies have reacted positively since results, despite these losses, possiblydue to an improved macro environment and liquidity, and partly pinned to hopes that no more losses willbe reported in the near term.

    EXHIBIT 6: 3QFY12 performance

    3QFY11 3QFY12 Change 2QFY12 Change BNPP ests vs BNPP ests

    (INR m) (INR m) (y-y %) (INR m) (q-q %) (INR m) (%)

    Revenue

    Larsen & Toubro 114,131 139,986 22.7 11,452 24.5 131,761 6.2Punj Lloyd 21, 23 27,012 25.5 23,917 12.9 25,400 6.3IVRCL 14,188 12,025 (15.2) 10,461 15.0 11,568 4.0

    Simplex Infra 11,676 15,964 36.7 13,233 20.6 14,244 12.1

    NCC 13,355 12,640 (5.4) 10,903 15.9 12,430 1.7

    Total 174,873 207,626 18.7 170,966 21.4 195,403 6.3Total (ex L&T) 60,742 67,641 11.4 58,514 15.6 63,642 6.3

    EBITDA

    Larsen & Toubro 12,379 13,431 8.5 11,741 14.4 14,254 (5.8)

    Punj Lloyd 958 1,404 46.6 2,015 (30.3) 2,184 (35.7)

    IVRCL 1,404 948 (32.5) 938 1.1 1,041 (8.9)

    Simplex Infra 1,085 1,294 19.2 1,204 7.5 1,211 6.9

    NCC 1,276 777 (39.1) 1,032 (24.7) 1,176 (34.0)

    Total 17,102 17,854 4.4 16,929 5.5 19,867 (10.1)

    Total (ex L&T) 4,723 4,423 (6.4) 5,188 (14.8) 5,613 (21.2)

    EBITDA margin (%)

    Larsen & Toubro 10.8 9.6 10.4 10.8Punj Lloyd 4.5 5.2 8.4 8.6

    IVRCL 9.9 7.9 9.0 9.0

    Simplex Infra 9.3 8.1 9.1 8.5

    NCC 9.6 6.1 9.5 9.5

    Total 9.8 8.6 9.9 10.2

    Total (ex L&T) 7.8 6.5 8.9 8.8

    Interest

    Larsen & Toubro 1,757 1,907 8.5 1,970 (3.2) 2,300 (17.1)

    Punj Lloyd 845 1,372 62.4 1,299 5.7 1,300 5.6

    IVRCL 592 661 11.6 652 1.3 670 (1.4)

    Simplex Infra 362 550 52.0 512 7.6 511 7.7

    NCC 438 694 58.3 709 (2.2) 700 (0.9)

    Total 3,994 5,184 29.8 5,142 0.8 5,481 (5.4)

    Total (ex L&T) 2,237 3,277 46.5 3,172 3.3 3,181 3.0

    Net profit (recurring)

    Larsen & Toubro 8,108 9,916 22.3 7,984 24.2 8,678 14.3

    Punj Lloyd (621) 132 (121.3) 248 (46.7) 128 3.2

    IVRCL 425 68 (84.0) 81 (16.6) 114 (40.6)

    Simplex Infra 232 180 (22.4) 192 (6.3) 191 (5.7)

    NCC 404 (95) (123.5) 114 (183.2) 199 (147.7)

    Total 8,547 10,201 19.3 8,619 18.3 9,309 9.6

    Total (ex L&T) 440 285 (35.2) 635 (55.1) 632 (54.9)

    Sources: Companies data; BNP Paribas estimates

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Two downgrades, four TP changes and some estimates tweaked

    EXHIBIT 7: Summary of changes

    ----- Larsen & Toubro ----- ------ Simplex Infra ------ -------------- NCC -------------- ------------- IVRCL ------------- ------- Punj Lloyd -------

    Old New Change Old New Change Old New Change Old New Change Old New Change

    (INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%)

    FY12E

    Revenue 533,065 533,065 - 51,795 57,657? 11.3 52,197 51,620? (1.1) 56,516 52,719 (6.7) 99,847 101,235 1.4

    EBITDA 63,148 63,148 - 5,161 5,034 (2.5) 5,098 4,300 (15.6) 4,971 4,465 (10.2) 9,117 7,608 (16.5)

    EBITDA margin (%) 11.85 11.85 9.96 8.73 9.77 8.33 8.80 8.47 9.13 7.52

    Interest 7,499 7,499 - 1,854 2,336 26.0 2,680 2,700 0.7 2,512 2,602 3.6 4,702 5,046 7.3

    Net profit 42,718 42,718 - 967 811 (16.1) 1,137 572 (49.7) 1,124 809 (28.0) 1,242 476 (61.7)

    FY13E

    Revenue 646,647 650,266 0.6 58,549 66,355 13.3 55,009 59,345 7.9 63,260 62,058 (1.9) 109,316 130,336 19.2

    EBITDA 76,810 77,203 0.5 5,833 6,297 8.0 5,327 5,343 0.3 5,848 5,342 (8.7) 9,918 11,098 11.9

    EBITDA margin (%) 11.90 11.87 9.96 9.49 9.68 9.00 9.24 8.61 9.07 8.51

    Interest 7,561 7,561 - 1,562 2,462 57.6 2,438 2,624 7.6 2,543 2,567 0.9 4,275 5,362 25.4

    Net profit 48,750 49,013 0.5 1,457 1,382 (5.2) 1,378 1,242 (9.8) 1,585 1,230 (22.4) 1,973 1,621 (17.9)

    FY14E

    Revenue 714,947 724,073 1.3 65,364 72,666 11.2 57,712 69,324 20.1 72,490 73,561 1.5 120,837 155,166 28.4

    EBITDA 84,530 85,523 1.2 6,510 6,896 5.9 5,582 6,243 11.8 6,699 6,330 (5.5) 10,955 13,214 20.6

    EBITDA margin (%) 11.80 11.81 9.96 9.49 9.67 9.00 9.25 8.60 9.07 8.52

    Interest 7,823 7,823 - 1,875 2,444 30.3 2,247 2,776 23.5 2,105 2,315 10.0 4,009 4,907 22.4

    Net profit 52,950 53,614 1.3 1,522 1,641 7.8 1,603 1,666 3.9 2,373 1,985 (16.3) 2,649 3,104 17.2

    Rating BUY BUY BUY BUY BUY HOLD BUY HOLD REDUCE REDUCE

    Target price (INR) 1,425 1,500 5.3 267 272 1.9 70 59 (15.7) 42 49 16.7 47 47 -

    Source: BNP Paribas estimates

    Historical financials A snapshot

    L&Ts performance over FY08-12E in terms of both order inflow growth and order book growth has beensignificantly better than other construction names and far more consistent (see Exhibits 8 and 9); thisclearly indicates L&Ts dominant leadership position in the sector. L&Ts FY08-12E order inflow CAGR is 20%and order book CAGR is 33% over this period, according to our estimates. The companys presence acrossthe infrastructure spectrum has allowed it to make up for a slowdown in one sector by procuring ordersfrom another, possibly new, sector. Further testament to the consistent performance is that the companyhas managed high growth in spite of a much higher base.

    EXHIBIT 8: Order inflow comparison EXHIBIT 9: Order book comparison

    Note: Percentages indicate FY08-12 CAGR

    Sources: Companies; BNP Paribas estimates

    Note: Percentages indicate FY08-12 CAGR

    Sources: Companies; BNP Paribas estimates

    L&Ts strong order book and order inflows have been supported by strong execution as well. FY08-12Erevenue CAGR is 21% for L&T. NCC is the closest and its CAGR is 10%. Additionally, EBITDA margins havebeen 200-250bp higher compared with other construction names. FY12 is likely to see a dip margins acrossthe board. L&T management has guided for a 75-125bp decline in EBITDA margin. Other companies are also

    0

    100,000

    200,000

    300,000

    400,000

    500,000

    600,000

    700,000

    800,000

    Larsen &Toubro

    Punj Lloyd IVRCL SimplexInfra

    NCC

    (INR m)FY08 FY09 FY10 FY11 FY12E

    20%

    -5%5%

    -1%10%

    0

    200,000

    400,000

    600,000

    800,000

    1,000,000

    1,200,0001,400,000

    1,600,000

    1,800,000

    Larsen &Toubro

    Punj Lloyd IVRCL SimplexInfra

    NCC

    (INR m)FY08 FY09 FY10 FY11 FY12E

    33%

    9% 25%14% 16%

    7

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    likely to witness a similar dip. A large portion of the margin erosion is due to lower absorption of fixedoverheads resulting from slower execution along with higher raw material prices.

    EXHIBIT 10: Revenue comparison EXHIBIT 11: EBITDA margin comparison

    Note: Percentages indicate FY08-12 CAGR

    Sources: Companies; BNP Paribas estimates

    Note: Percentages indicate FY08-12 CAGR

    Sources: Companies; BNP Paribas estimates

    The increase in debt levels across companies has not been uniform. While a large portion of the increasehas been for working capital needs, certain companies, such as Simplex [SINF IN] and Punj Lloyd have alsoinvested in equipment. Surprisingly, the FY08-12E CAGR in interest cost is highest for L&T (57%); we believethis is primarily due to the availability of low cost Yen-denominated debt that the company had that waslater converted into Rupee-denominated debt. Simplex has had the lowest CAGR in interest costs in spite ofhaving one of the highest increases in debt levels.

    EXHIBIT 12: Total debt EXHIBIT 13: Interest cost

    Sources: Companies; BNP Paribas estimates Note: Percentages indicate FY08-12 CAGRSources: Companies; BNP Paribas estimates

    The increase in debt, along with the high interest rate regime, has resulted in poor profitability (seeExhibits 12 and 13). L&T is the only company that has reported a consistent increase in net profit y-y ineach of the years, with a CAGR of 20%. Simplex has the next best performance, where net profit CAGR hasbeen flat. In the case of each of the others, net profits have declined over this period. On the margin front,again, L&T stands out as the only consistent performer.

    0

    100,000

    200,000

    300,000

    400,000

    500,000

    600,000

    Larsen &Toubro

    Punj Lloyd IVRCL SimplexInfra

    NCC

    (INR m) FY08 FY09 FY10 FY11 FY12E

    21%

    7%

    10% 19% 10%

    0

    2

    4

    6

    8

    10

    12

    14

    Larsen &Toubro

    Punj Lloyd IVRCL SimplexInfra

    NCC

    (%) FY08 FY09 FY10 FY11 FY12E

    0

    10,000

    20,000

    30,000

    40,000

    50,000

    60,000

    70,000

    80,000

    90,000

    Larsen &

    Toubro

    Punj Lloyd IVRCL Simplex

    Infra

    NCC

    (INR m) FY08 FY09 FY10 FY11 FY12E

    0

    1,000

    2,000

    3,000

    4,000

    5,000

    6,000

    7,000

    8,000

    Larsen &

    Toubro

    Punj Lloyd IVRCL Simplex

    Infra

    NCC

    (INR m) FY08 FY09 FY10 FY11 FY12E

    57%

    29%

    54% 23% 39%

    8

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    EXHIBIT 14: Net profit EXHIBIT 15: Net profit margin

    Note: Percentages indicate FY08-12 CAGRSources: Companies; BNP Paribas estimates

    Sources: Companies; BNP Paribas estimates

    Balance sheet strength L&Ts key strength is its balance sheet, along with its ability to manage its working

    capital cycle. Amongst the others, Simplex has a higher net debt-to-equity ratio but this is primarily due tocapital expenditure for equipment; the company also has the lowest working capital requirement per unitrevenue as compared to the other construction names.

    EXHIBIT 16: Net debt to equity EXHIBIT 17: Working capital to revenue

    Sources: Companies; BNP Paribas estimates Sources: Companies; BNP Paribas estimates

    Valuation

    EXHIBIT 18: Relative valuation

    BBG Share Avg -- EV/EBITDA --EV/EBITDA -

    ex Others ------ P/E ------ P/E - ex Others --- P/BV --- -------- ROE --------

    code Company price vol 11E 12E 13E 11E 12E 13E 11E 12E 13E 11E 12E 13E 11E 12E 13E 11E 12E 13E

    (INR) (USD m) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (x) (%) (%) (%)

    LT IN Larsen & Toubro 1,267 76.8 15.1 13.4 11.0 10.6 9.4 7.7 21.5 18.3 15.9 17.0 14.4 12.6 3.5 3.1 2.7 18.1 18.1 18.0

    SINF IN Simplex Infrastructures 224 0.1 5.7 5.3 4.3 5.6 5.3 4.2 9.0 13.7 8.0 8.7 13.3 7.8 1.0 1.0 0.9 13.1 12.0 8.1

    IVRC IN IVRCL Ltd 54 10.4 6.6 7.6 6.3 5.7 6.6 5.5 8.9 17.8 11.7 6.2 12.4 8.1 0.7 0.7 0.7 8.4 4.0 5.9

    NJCC IN NCC Ltd/India 60 1.6 (10.7) (9.1) (7.9) (8.2) (7.0) (6.1) 9.4 27.0 12.5 3.9 11.2 5.2 0.7 0.7 0.6 7.1 2.4 5.1

    PUNJ IN Punj Lloyd Ltd 54 5.0 8.2 6.7 4.6 8.2 6.7 4.6 (35.4) 37.7 11.1 (35.4) 37.7 11.1 0.6 0.6 0.6 (79.2) (103.4) (127.6)

    Mean 5.0 4.8 3.7 4.4 4.2 3.2 2.7 22.9 11.8 0.1 17.8 8.9 1.3 1.2 1.1 (6.5) (13.4) (18.1)

    Median 6.6 6.7 4.6 5.7 6.6 4.6 9.0 18.3 11.7 6.2 13.3 8.1 0.7 0.7 0.7 8.4 4.0 5.9

    Prices as of 5 March 2012Sources: Bloomberg; BNP Paribas estimates

    (5,000)

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    40,000

    45,000

    Larsen &

    Toubro

    Punj Lloyd IVRCL Simplex

    Infra

    NCC

    (INR m)FY08 FY09 FY10 FY11 FY12E

    20%

    -40% -20% -23%-3%

    (4)

    (2)

    0

    2

    4

    6

    8

    10

    Larsen &Toubro

    Punj Lloyd IVRCL Simplex Infra NCC

    (%)FY08 FY09 FY10 FY11 FY12E

    0

    20

    40

    6080

    100

    120

    140

    160

    180

    Larsen &

    Toubro

    Punj Lloyd IVRCL Simplex

    Infra

    NCC

    (%)FY08 FY09 FY10 FY11 FY12E

    0

    10

    20

    30

    40

    50

    60

    70

    Larsen &

    Toubro

    Punj Lloyd IVRCL Simplex

    Infra

    NCC

    (%)FY08 FY09 FY10 FY11 FY12E

    9

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    India Construction Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    EXHIBIT 19: Price performance

    Share ------------------------------ Performance ------------------------------

    BBG code Company price 1-wk 1-mth 3-mth 6-mth YTD 1-yr

    (INR) (%) (%) (%) (%) (%) (%)

    Coverage Universe

    LT IN Larsen & Toubro 1,267 (4) (5) (1) (19) 31 (19)

    SINF IN Simplex Infra 224 (3) 12 14 (1) 28 (30)

    IVRC IN IVRCL Ltd 54 4 (4) 49 56 95 (26)

    NJCC IN NCC Ltd 60 10 1 51 7 82 (41)

    PUNJ IN Punj Lloyd 54 1 4 13 (6) 44 (10)

    SENSEX Index SENSEX 17,363 (2) 1 5 5 14 (3)

    Prices as of 5 March 2012Sources: Bloomberg: BNP Paribas

    10

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    COMPANY REPORTEQUITIES RESEARCH

    LT IN

    LARSEN & TOUBROINDIA / CONSTRUCTION

    HOW WE DIFFER FROM THE STREET

    BNPP Consensus % Diff

    Target Price (INR) 1,500.00 1,456.00 3.0

    EPS 2012 (INR) 69.37 68.42 1.4

    EPS 2013 (INR) 79.63 77.11 3.3

    Positive Neutral Negative

    Market Recs 35 7 6

    BUYUNCHANGEDTARGET

    PRIOR TP

    CLOSE

    UP/DOWNSIDE

    INR1,500.00

    INR1,425.00

    INR1,266.75

    +18.4%

    INDUSTRY OUTLOOK

    Stick to qualityCHANGEQuality company poised to reap benefits from policy action; BUY

    L&T remains our top pick in the sector due to its balance sheet quality

    and diversified source of orders. The stock has rallied 31% YTD (vs Sensexup 14%), on increased investor risk appetite triggered by positive globaldevelopments and encouraging policy action in the Indian infrastructure

    industry. We maintain our BUY rating.

    CATALYSTFY13 outlook and guidance, major order wins

    FY13 guidance issued at 4QFY12 result announcement, in addition tomajor order wins this quarter, should be the catalyst for the stock inFY13. We expect 11% order flow growth, 22% revenue growth and flatEBITDA margin (11.9%) for FY13. We believe that policy action coupledwith lower interest rates should spur order activity in 2HFY13.

    VALUATIONRevising SoTP-based TP to INR1,500 (from INR1,425)

    We revise our TP to INR1,500 from INR1,425. Our standalone valuation isINR1,235 (vs INR1,155 earlier) based on 9.6x FY13E EV/EBITDA (16x P/E).Subsidiaries contribute INR265 (vs INR270 earlier) due to higher marketvalue of L&Ts finance subsidiary. Risks to our TP include: 1) lower orderintake, 2) higher raw material costs, and 3) no reduction in interest rates.

    KEY CHARTOrder book of INR1,433b (as of 31 Dec 2011)

    Sources: Larsen & Toubro; BNP Paribas

    Process

    3.4%

    Oil & Gas15.9%

    Power2.0%Infrastructure

    60.2%

    Others

    18.5%

    CHANGE IN NUMBERS

    Vishal Sharma, [email protected]

    +91 22 33704377

    Shashank [email protected]

    +91 22 33704336

    6 MARCH 2012

    KEY STOCK DATA

    YE Mar (INR m) 2012E 2013E 2014E

    Revenue 533,065 650,266 724,073

    Rec. net profit 42,718 49,013 53,614

    Recurring EPS (INR) 69.37 79.63 87.11

    Prior rec. EPS (INR) 69.37 79.21 86.03

    Chg. In EPS est. (%) 0.0 0.5 1.3

    EPS growth (%) 17.6 14.8 9.4

    Recurring P/E (x) 18.3 15.9 14.5

    Dividend yield (%) 1.2 1.2 1.2

    EV/EBITDA (x) 9.8 8.6 7.9

    Price/book (x) 3.1 2.7 2.3

    Net debt/Equity (%) (1.5) (1.0) 0.8

    ROE (%) 18.1 18.0 17.0

    Share price performance 1 Month 3 Month 12 Month

    Absolute (%) (6.5) (3.7) (21.4)

    Relative to country (%) (5.8) (8.9) (15.5)

    Next results May 2012

    Mkt cap (USD m) 15,629

    3m avg daily turnover (USD m) 79.9

    Free float (%) 90

    Major shareholder Life Insurance Corporation of India(19%)

    12m high/low (INR) 1,863.45/977.70

    3m historic vol. (%) 40.4

    ADR ticker -

    ADR closing price (USD) -

    Issued shares (m) 611

    Sources: Bloomberg consensus; BNP Paribas estimates

    (33)

    (23)

    (13)

    (3)

    7

    17

    931

    1,131

    1,331

    1,531

    1,731

    1,931

    Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

    (%)(INR) Larsen & Toubro Rel to MSCI India

    11

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    Larsen & Toubro

    RISK EXPERT

    Key Earnings Drivers & Sensitivity

    A 5% change in our FY13 revenue growth estiimpact on our FY13 EPS of INR79.63.A 100bp change in our FY13 EBITDA margin e

    has an 8.9% impact on our FY13 EPS.

    Larsen & Toubro and IRCP12M INDEX(3M and 6M Realised-Vol)

    India Sector Correlation Matrix at

    Autos Banks

    Autos 1.00 0.66

    Banks 1.00

    Engineering & Construction

    Metals & Mining

    Oil & Gas

    IT Services

    Telecom

    Utilities

    Property

    Source: BNPP Paribas Sector Strategy

    The Risk Experts

    Our starting point for this page is a recogniti

    factors that can have a significant impact on

    performance, sometimes independently of b

    With our Risk Expert page, we identify the kethat can impact stock performance.

    This analysis enhances the fundamental wor

    rest of this report, giving investors yet anothuse in their decision-making process.

    0

    10

    20

    30

    40

    50

    60

    70

    80

    90

    May-05 May-06 May-07 May-08 May-09 May-

    (%) Larsen & Toubro - 3M Realised -V ol

    Larsen & Toubro - 6M Realised -V ol

    India FIMMDA INR paper rates 12m -3M Realised -India FIMMDA INR paper rates 12m -6M Realised -

    Sources: Bloomberg; BNP Paribas

    BNP PARIBAS

    Macro BUYUNCHANGED

    mate has a 4.3%

    stimate of 11.8%

    FY13E EPS -------------------

    12.0% 17

    ---EBITDAmargin--- 9.8% 59.76 6

    10.8% 66.2 611.8% 72.81 7

    12.8% 79.33 8

    13.8% 85.86 8

    Source: BNP Paribas estimates

    Regression Larsen & T

    30 December 2011

    ngineering &Construction

    Metals &Mining Oil & Gas IT Services

    0.61 0.62 0.51 0.43

    0.71 0.72 0.59 0.53

    1.00 0.69 0.56 0.48

    1.00 0.66 0.55

    1.00 0.50

    1.00

    Long/Short Chart

    on of the macro

    stock-price

    ttom-up factors.

    macro risks

    k laid out in the

    er resource to

    Sources: Bloomberg, BNP Paribas

    0 May-11

    olol

    -26.00%

    -16.00%

    -6.00%

    4.00%

    14.00%

    24.00%

    -14.00% -9.00% -4.00% 1.0

    Larsen & Toubro

    Larsen & Toubro = 1737 + -31.8697 * IRCP12R Square = 0.0245

    Regression based on 261 observations of 5the explanation of R-squareSources: Bloomberg; BNP Paribas

    -1.51

    -0.51

    0.49

    1.49

    2.49

    3.49

    4.49

    5.49

    Mar-09 Sep-09 Mar-10

    (x) Larsen & Toubro - Bh

    Sources: Bloomberg; BNP Paribas

    Vishal Sharma, CFA

    6 MARCH 2012

    LARSEN & TOUBROLT IN

    ----- Revenue growth ------------------------

    .0% 22.0% 27.0% 32.0%

    .60 65.43 68.26 71.09

    .41 72.53 75.65 78.77

    .22 79.63 83.04 86.45

    .03 86.73 90.43 94.13

    .85 93.84 97.83 101.82

    ubro to IRCP12M INDEX

    Telecom Utilities Property

    0.36 0.56 0.58

    0.41 0.62 0.70

    0.41 0.63 0.68

    0.42 0.65 0.74

    0.36 0.59 0.59

    0.29 0.46 0.43

    1.00 0.45 0.42

    1.00 0.65

    1.00

    0% 6.00% 11.00% 16.00%

    India FIMMDA INR paper rates 12m

    M Index

    years weekly data. Please refer to Appendix 1 for

    -2s

    -1s

    Mean

    +1s

    +2s

    Sep-10 Mar-11 Sep-11

    rat Heavy Elect

    12

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    Larsen & Toubro

    RISK EXPERT

    Principal ActivitiesOperating Activities

    Architectural, engineering, and related services

    Switchgear and switchboard apparatusmanufacturing

    Other industrial machinery manufacturing

    Larsen & Toubro is an Indian technology, engineering, construction

    company. The firm operates through the following divisions: Engine

    Projects, Heavy Engineering, Construction, Power, Electrical & Elect

    Industrial Products, IT & Engineering Services, Railway Projects, Fin

    Shipbuilding. The Engineering & Construction Projects division prov

    'turnkey EPC solutions in all engineering disciplines, including civil,

    and process control/automation.

    Direct Environment Damage Issue

    The direct environmental damage costs are those incu& Toubro emits pollutants or uses natural resources asactivities. The five most significant direct impacts are li

    Emission Resource (2010)(Tonnes) Source Qu

    Carbon Dioxide ENV* 2

    Non-hazardous Waste ENV

    Landfill (Non-Hazardous) TC

    Lake (Process Water) ENV 1,7

    Hazardous Waste ENV

    Other 2

    Total 2,3

    Direct Impact Ratio (%) 0.16 Direct Cost /

    Peer Analysis Country

    Bubble size indicatesMarket Cap

    BHARAT HEAVYELECT

    RELIANCEINFRASTRUCTU

    LARSEN &TOUBRO

    BHEL IN RELI IN LT IN

    Impact Ratio (%) 2.85 13.60 0.87

    Turnover (INR m) 356,278.4 152,599.0 462,225.8

    Market Cap (US $ bn) 14.11 3.54 15.63

    Year 2010 2010 2010

    Impact ratio and turnover of Larsen & Toubro (LT IN) agai

    same country. A higher Impact ratio indicates higher exte

    costs and weaker environment performance.

    BHEL IN2.85

    RELI IN13.60

    -2.0

    .0

    2.0

    4.0

    6.0

    8.0

    10.0

    12.0

    14.0

    16.0

    ImpactRatio(%)

    BNP PARIBAS

    Environmental

    % of Turnover

    82.93

    8.16

    5.67

    and manufacturing

    ering & Construction

    ronics, Machinery &

    ancial Services and

    ides design-build/

    mechanical, electrical

    BUYUNCHANGED

    Key Ratios (2010)

    Impact Ratio (%)EBITDA Impact Ratio (%)

    Direct Impact Ratio (%)Direct Cost / EBITDA (%)

    Supply Chain Impact Ratio (%)Cost Ratios (%)

    *Impact Ratio = Total Environment

    s Supply Chain Enviro

    red when Larsenpart of its ownsted below.

    The Supply Chain environmentala result of the activities carried oufive most significant Supply Chain

    antityExternal Cost

    (INR m)

    7,779 449.83

    4,778 57.19

    1,570 49.78

    1,319 44.37

    7,003 27.99

    3,976 93.69

    6,426 722.85

    BITDA (%) 0.77

    Emission Resource (2010)(Tonnes)

    Carbon Dioxide

    Other (Process Water)

    Particulates

    Sulphur Dioxide

    Sum of VOCs

    Other

    Total

    Supply Chain Impact Ratio (%) 0.71

    Peer Analysis - Secto

    Bubble size indicatesMarket Cap

    BHARAT HEAVYELECT

    CROMGRE

    BHEL IN C

    Impact Ratio (%) 2.85

    Turnover (INR m) 356,278.4 97,

    Market Cap (US $ bn) 14.11

    Year 2010

    nst its peers in the

    rnal environment

    Impact ratio and turnover of Larsen

    LT IN0.87

    BHEL IN2.85

    CRG IN2.

    .00

    .50

    1.00

    1.50

    2.00

    2.50

    3.00

    3.50

    ImpactRatio(%)

    Vishal Sharma, CFA

    6 MARCH 2012

    LARSEN & TOUBROLT IN

    0.874.28

    0.160.77

    0.713.51

    Damage Cost/Turnover

    ment Damage Issues VishalSharma, CFA

    amage costs are those that are incurred ast by Larsen & Toubros supply chain. Theimpacts are listed below.

    QuantityExternal Cost

    (INR m)

    765,402 1,335.65

    33,627,420 832.89

    340 209.60

    3,099 206.38

    1,094 86.68

    139,432,918 630.25

    173,830,274 3,301.46

    Supply Chain Cost / EBITDA (%) 3.51

    r

    PTONAVES

    DONGFANGELECTRIC

    LARSEN &TOUBRO

    RG IN 1072 HK LT IN

    2.36 1.49 0.87

    800.8 43,109.0 462,225.8

    1.77 5.45 15.63

    2010 2010 2010

    & Toubro against its regional peers.

    EQUITY36

    1072 HK1.49

    LT IN0.87

    13

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    Larsen & Toubro Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Remains our top sector pick

    L&T continues to be our top pick in the sector due to its balance sheet quality and diversified source oforders. The stock has rallied 31% YTD (vs Sensex up 14%), due to increased investor risk appetite triggeredby positive global developments and encouraging policy action in the Indian infrastructure sector. Theintervention by Prime Ministers Office for resolution of issues in the power sector and expectation ofpossible rate cuts by the RBI were two major positive developments domestically that resulted in thererating of the entire sector. Going forward, we believe L&T is the best positioned company within thesector for winning orders, due to its segmental and geographical diversification. Additionally, the companyis forming JVs in the Middle East and expects these to contribute USD1b of orders incrementally in 2HFY13.

    Ability to meet guidance hinges on certain large orders

    L&T revised its FY12 guidance to 0-5% y-y growth in order flow, 25% y-y growth in revenue, and 75-125bppressure on E&C EBITDA margin. To achieve its order flow guidance, L&T must win INR303b-340b of ordersin 4QFY12. There are certain large orders in the pipeline that could help the company achieve the lower endof its guidance.

    Catalyst: FY13 outlook and guidance

    Typically, L&T announces its forward looking guidance along with 4Q results, which in our view will be thecatalyst for the stock beyond 4Q. We expect the company to grow its E&C orders by 11% y-y in FY13, aspolicy action coupled with lower interest rates should spur order activity in 2HFY13. We expect L&T to

    generate FY13 revenue growth of 22% y-y driven by its E&C order book (at an execution rate of 29%, vs27.5% for FY12E) with flat EBITDA margin y-y at 11.9%.

    Changes in estimates

    EXHIBIT 1: Changes in estimates

    Year-end 31 Mar ------------ 2012E ------------ -------------- 2013E -------------- --------------- 2014E ---------------

    Old New Change Old New Change Old New Change(INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%)

    New orders 739,257 739,257 817,863 817,863 910,007 910,007

    Order growth (%) 1.3 1.3 10.6 10.6 11.3 11.3

    Revenue 535,065 535,065 646,647 654,566 0.6 714,947 728,073 1.9

    EBITDA 63,148 63,148 76,810 77,203 0.5 84,530 85,523 1.2

    EBITDA margin (%) 11.8 11.8 11.9 11.9 11.8 11.8

    Interest 7,499 7,499 7,561 7,561 7,823 7,823

    Net profit 42,718 42,718 48,750 49,013 0.5 52,950 53,614 1.3

    EPS (INR) 69.37 69.37 79.21 79.63 0.5 86.03 87.11 1.3

    Source: BNP Paribas estimates

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    Larsen & Toubro Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Valuation

    EXHIBIT 2: Change in TP

    ------------------------- Old ------------------------- ----------------------------- New -----------------------------

    Entities MetricEquityvalue

    Value/share Comments

    Equityvalue

    Value/share Comments

    (INR m) (INR) (INR m) (INR)

    L&T Standalone EV/EBITDA 710,888 1,155 9x EV/EBITDA; implies 15x P/E 760,043 1,235 9.6x EV/EBITDA; implies 16x P/E

    Larsen & Toubro Infotech P/E 32,072 52 8.0x FY13 31,948 52 8.0x FY13 P/E

    L&T Finance Holdings Mkt value 58,759 96 20% discount to market value 54,622 89 20% discount to market value

    L&T Shipbuilding P/BV 6,199 10 1.0x FY11 book value 6,199 10 1.0x FY11 book value

    Larsen & Toubro International FZE P/BV & P/E 18,323 30 1.0x FY11 book value 18,323 30 1.0x FY11 book value or 5.0x FY13E P/E

    L&T Infrastructure DevelopmentProjects Limited

    P/BV 31,615 51 2.0x FY11 book value 31,615 52 2.0x FY11 book value

    L&T MHI Turbine JV P/BV 3,152 5 4.0x FY11 book value 3,152 5 4.0x FY11 book value

    L&T MHI Boiler JV P/BV 2,357 4 4.0x FY11 book value 2,357 4 4.0x FY11 book value

    L&T Power Development P/BV 11,396 19 1.0x equity 11,396 19 1.0x equity

    L&T Forgings P/BV 2,167 4 1.0x FY10 book value 2,167 4 1.0x FY10 book value

    876,928 1,425 921,823 1,500

    Source: BNP Paribas estimates

    We are revising our TP to INR1,500 from INR1,425. Our standalone valuation has increased to INR1,235 fromINR1,155 based on slightly higher multiple assumptions. Our revised multiple of 9.6x EV/EBITDA or 16xFY13E P/E is at a slight premium to the historical average due to the improved macro environment. Ourrevised subsidiary valuation is INR265 (vs INR270 earlier). Risks to our target price include: 1) lower orderintake, 2) higher raw material costs, and 3) no reduction in interest rates.

    EXHIBIT 3: Historical P/E band chart EXHIBIT 4: Historical EV/EBITDA band chart

    Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas

    Current, 15.0

    Mean, 21

    Mean + 1SD,28

    Mean - 1SD,13

    Mean + 2SD,35

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    Oct-00 Apr-02 Oct-03 Apr-05 Oct-06 Apr-08 Oct-09 Apr-11

    (x)

    Current, 11.1

    Mean, 12.3

    Mean+1SD,16.3

    Mean-1SD,8.3

    Mean+2SD,20.2

    0

    5

    10

    15

    20

    25

    30

    Oct-00 Apr-02 Oct-03 Apr-05 Oct-06 Apr-08 Oct-09 Apr-11

    (x)

    15

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    Larsen & Toubro Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Financial statementsLarsen & Toubro

    Profit and Loss (INRm) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Revenue 366,752 434,959 533,065 650,266 724,073

    Cost of sales ex depreciation (284,536) (334,316) (413,355) (507,088) (572,515)

    Gross profit ex depreciation 82,216 100,643 119,710 143,178 151,559

    Other operating income 3,597 4,090 2,000 4,300 4,300

    Operating costs (37,657) (48,507) (58,562) (70,276) (70,336)

    Operating EBITDA 48,156 56,226 63,148 77,203 85,523

    Depreciation (4,146) (5,992) (7,153) (8,300) (9,468)

    Goodwill amortisation 0 0 0 0 0

    Operating EBIT 44,010 50,234 55,995 68,902 76,055

    Net financing costs (5,053) (6,474) (7,499) (7,561) (7,823)

    Associates 0 0 0 0 0

    Recurring non operating income 9,103 11,949 14,331 12,050 12,050

    Non recurring items 10,748 2,621 0 0 0

    Profit before tax 58,807 58,329 62,827 73,391 80,281

    Tax (16,210) (19,459) (20,109) (24,379) (26,667)

    Profit after tax 42,597 38,871 42,718 49,013 53,614

    Minority interests 0 0 0 0 0

    Preferred dividends 0 0 0 0 0Other items 0 0 0 0 0

    Reported net profit 42,597 38,871 42,718 49,013 53,614

    Non recurring items & goodwill (net) (10,748) (2,621) 0 0 0

    Recurring net profit 31,849 36,250 42,718 49,013 53,614

    Per share (INR)

    Recurring EPS * 52.69 58.98 69.37 79.63 87.11

    Reported EPS 71.81 64.16 69.95 80.11 87.63

    DPS 14.63 14.63 14.60 14.57 14.63

    Growth

    Revenue (%) 9.0 18.6 22.6 22.0 11.4

    Operating EBITDA (%) 22.8 16.8 12.3 22.3 10.8

    Operating EBIT (%) 21.7 14.1 11.5 23.1 10.4Recurring EPS (%) 14.9 12.0 17.6 14.8 9.4

    Reported EPS (%) 20.1 (10.6) 9.0 14.5 9.4

    Operating performance

    Gross margin inc depreciation (%) 21.3 21.8 21.1 20.7 19.6

    Operating EBITDA margin (%) 13.1 12.9 11.8 11.9 11.8

    Operating EBIT margin (%) 12.0 11.5 10.5 10.6 10.5

    Net margin (%) 8.7 8.3 8.0 7.5 7.4

    Effective tax rate (%) 27.6 33.4 32.0 33.2 33.2

    Dividend payout on recurring profit (%) 27.8 24.8 21.0 18.3 16.8

    Interest cover (x) 10.5 9.6 9.4 10.7 11.3

    Inventory days 46.3 16.3 74.5 122.5 127.3

    Debtor days 105.6 99.0 94.2 94.2 98.4

    Creditor days 217.0 243.7 230.5 205.8 197.4Operating ROIC (%) 31.0 31.1 27.3 27.4 25.1

    Operating ROIC - WACC (%) 15.9 16.0 12.2 12.3 10.0

    ROIC (%) 25.0 23.8 21.4 20.6 19.3

    ROIC - WACC (%) 9.9 8.7 6.3 5.5 4.2

    ROE (%) 20.7 18.1 18.1 18.0 17.0

    ROA (%) 8.4 7.8 7.9 7.9 7.8

    *Pre exceptional, pre-goodwill and fully diluted

    Revenue By Division (INRm) 2010A 2011A 2012E 2013E 2014E

    E&C 318,420 382,187 471,936 585,500 647,018

    MIP 21,906 27,931 29,685 34,411 41,626

    EBG 28,690 32,139 33,872 37,259 40,985

    Others 2,648 6,604 9,512 2,348 2,620

    Unallocable (4,913) (13,901) (11,940) (9,252) (8,176)

    Sources: Larsen & Toubro; BNP Paribas estimates

    Revenue growth should be

    strong based on the current

    order book

    EBITDA margin should be

    steady at these levels; we

    see limited downside from

    current levels

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    Larsen & Toubro Vishal Sharma, CFA

    BNP PARIBAS 6 MARCH 2012

    Larsen & Toubro

    Cash Flow (INR m) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Recurring net profit 31,849 36,250 42,718 49,013 53,614

    Depreciation 4,146 5,992 7,153 8,300 9,468

    Associates & minorities 0 0 0 0 0

    Other non-cash items 0 0 0 0 0

    Recurring cash flow 35,995 42,242 49,871 57,313 63,082

    Change in working capital 17,582 (2,772) (25,108) (24,611) (34,641)

    Capex - maintenance 0 0 0 0 0

    Capex - new investment (15,719) (37,891) (29,487) (24,701) (24,920)Free cash flow to equity 37,858 1,579 (4,724) 8,001 3,522

    Net acquisitions & disposals (3,116) (7,058) 0 0 0

    Dividends paid (7,192) (8,670) (8,915) (8,915) (8,948)

    Non recurring cash flows (14,148) 8,752 (1,120) (69) (69)

    Net cash flow 13,402 (5,397) (14,759) (984) (5,496)

    Equity finance 21,327 3,473 0 0 0

    Debt finance (1,680) (6,051) 7,000 0 5,000

    Movement in cash 33,050 (7,976) (7,759) (984) (496)

    Per share (INR)

    Recurring cash flow per share 60.68 69.73 81.66 93.67 103

    FCF to equity per share 63.82 2.61 (7.74) 13.08 5.76

    Balance Sheet (INRm) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Working capital assets 249,297 332,208 386,882 455,342 500,438

    Working capital liabilities (212,429) (278,233) (306,679) (350,459) (360,845)

    Net working capital 36,869 53,975 80,203 104,884 139,593

    Tangible fixed assets 62,396 72,659 80,160 86,750 92,410

    Operating invested capital 99,265 126,635 160,364 191,633 232,004

    Goodwill 0 0 0 0 0

    Other intangible assets 1,261 1,922 1,755 1,567 1,357

    Investments 57,408 74,008 89,008 99,008 109,008

    Other assets 3,119 2,863 2,863 2,863 2,863

    Invested capital 161,053 205,428 253,990 295,071 345,232

    Cash & equivalents (93,964) (90,143) (82,384) (81,400) (80,904)

    Short term debt 0 0 0 0 0

    Long term debt * 68,008 71,611 78,611 78,611 83,611

    Net debt (25,956) (18,532) (3,773) (2,789) 2,707Deferred tax 3,893 5,497 5,497 5,497 5,497

    Other liabilities 0 0 0 0 0

    Total equity 183,116 218,463 252,265 292,363 337,028

    Minority interests 0 0 0 0 0

    Invested capital 161,053 205,428 253,990 295,071 345,232

    * includes convertibles and preferred stock which i s being treated as debt

    Per share (INR)

    Book value per share 309 361 413 478 551

    Tangible book value per share 307 357 410 475 549

    Financial strength

    Net debt/equity (%) (14.2) (8.5) (1.5) (1.0) 0.8

    Net debt/total assets (%) (5.6) (3.2) (0.6) (0.4) 0.3

    Current ratio (x) 1.6 1.5 1.5 1.5 1.6

    CF interest cover (x) 11.6 7.1 4.3 5.3 4.6

    Valuation 2010A 2011A 2012E 2013E 2014E

    Recurring P/E (x) * 24.0 21.5 18.3 15.9 14.5

    Recurring P/E @ target price (x) * 28.5 25.4 21.6 18.8 17.2

    Reported P/E (x) 17.6 19.7 18.1 15.8 14.5

    Dividend yield (%) 1.2 1.2 1.2 1.2 1.2

    P/CF (x) 20.9 18.2 15.5 13.5 12.3

    P/FCF (x) 19.8 486.0 (163.8) 96.9 220.1

    Price/book (x) 4.1 3.5 3.1 2.7 2.3

    Price/tangible book (x) 4.1 3.5 3.1 2.7 2.3

    EV/EBITDA (x) ** 12.8 10.8 9.8 8.6 7.9

    EV/EBITDA @ target price (x) ** 15.2 12.9 11.6 10.2 9.4

    EV/invested capital (x) 4.5 3.6 3.0 2.6 2.3

    * Pre exceptional, pre-goodwill and fully diluted** EBITDA includes associate income and recurring non-operating income

    Sources: Larsen & Toubro; BNP Paribas estimates

    Likely to remain net cash

    positive next year as well;

    demonstrates balance

    sheet strength

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    COMPANY REPORTEQUITIES RESEARCH

    SINF IN

    SIMPLEX INFRAINDIA / CONSTRUCTION

    HOW WE DIFFER FROM THE STREET

    BNPP Consensus % Diff

    Target Price (INR) 272.00 265.00 2.6

    EPS 2012 (INR) 16.39 19.23 (14.8)

    EPS 2013 (INR) 27.92 26.85 4.0

    Positive Neutral Negative

    Market Recs 18 10 2

    BUYUNCHANGEDTARGET

    PRIOR TP

    CLOSE

    UP/DOWNSIDE

    INR272.00

    INR267.00

    INR223.70

    +21.6%

    INDUSTRY OUTLOOK

    From strength to strengthCHANGETurnaround in international operations

    After seven quarters of y-y declines in international revenue, 3QFY12 saw

    a turnaround, with a 15% y-y increase. Domestic operations improvedeven further with 40% y-y growth. The companys ability to secure ordersrom across the infrastructure spectrum allows it to maintain a strong

    order pipeline even during times when certain sectors are depressed.

    CATALYSTMargin improvement, traction in Libya could be key catalysts

    We believe q-q EBITDA margin expansion is likely in 4QFY12. EBITDAmargin was subdued in 3QFY12 as several projects did not attain themargin recognition stage. Additionally, Libya could be the joker in thepack. As the political situation stabilises, contracts worth INR7b that thecompany had taken out of its order book could get reinstated.

    VALUATIONBUY with SoTP-based TP of INR272

    We arrive at our TP of INR272 based on a SoTP valuation. Theconstruction company contributes INR266 based on 5.0x FY13E EV/EBITDA(implied P/E of 9.5x). The stake in the highway BOT contributes INR6based on DCF. Risks include further deterioration in the infra investmentenvironment, increase in raw material prices and higher interest costs.

    KEY CHARTCurrent order book mix (INR144b)

    Sources: Simplex Infra; BNP Paribas

    Power

    25.5%

    Industrial14.0%

    Transportation19.0%

    Building &Housing26.5%

    Urban9.0%

    Others

    6.0%

    CHANGE IN NUMBERS

    Shashank [email protected]

    +91 22 33704336

    Vishal Sharma, [email protected]

    +91 22 33704377

    6 MARCH 2012

    KEY STOCK DATA

    YE Mar (INR m) 2012E 2013E 2014E

    Revenue 57,615 66,355 72,666

    Rec. net prof it 811 1,382 1,641

    Recurring EPS (INR) 16.39 27.92 33.14

    Prior rec. EPS (INR) 19.53 29.44 30.75

    Chg. In EPS est. (%) (16.1) (5.2) 7.8

    EPS growth (%) (34.2) 70.4 18 .7

    Recurring P/E (x) 13.7 8.0 6.8

    Dividend yield (%) 1.0 1.0 1.0

    EV/EBITDA (x) 5.2 4.4 4.2

    Price/book (x) 1.0 0.9 0.8

    Net debt/Equity (%) 154.1 144.5 134.1

    ROE (%) 7.3 11.4 12.2

    Share price performance 1 Month 3 Month 12 Month

    Absolute (%) 12.7 9.1 (30.5)

    Relative to country (%) 13.3 4.0 (24.6)

    Next results May 2012

    Mkt cap (USD m) 224

    3m avg daily turnover (USD m) 0.1

    Free float (%) 45

    Major shareholder Promoters (55%)

    12m high/low (INR) 349.55/162.40

    3m historic vol. (%) 49.0

    ADR ticker -

    ADR closing price (USD) -

    Issued shares (m) 50

    Sources: Bloomberg consensus; BNP Paribas estimates

    (52)

    (42)

    (32)

    (22)

    (12)

    (2)

    8

    138

    188

    238

    288

    338

    Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

    (%)(INR) Simplex Infra Rel to MSCI India

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    Simplex Infra

    RISK EXPERT

    Key Earnings Drivers & Sensitivity

    A 5ppt change in our FY13 revenue growth e13.2% impact on our FY13 EPS estimate of IN A 50bp change in our FY13 EBITDA margin es16.0% impact on our FY13 EPS.

    Simplex Infra and MXIN Index(3M and 6M Realised-Vol)

    India Sector Correlation Matrix at

    Autos Banks

    Autos 1.00 0.66

    Banks 1.00

    Engineering & Construction

    Metals & Mining

    Oil & Gas

    IT Services

    Telecom

    Utilities

    Property

    Source: BNPP Paribas Sector Strategy

    The Risk Experts

    Our starting point for this page is a recogniti

    factors that can have a significant impact on

    performance, sometimes independently of b

    With our Risk Expert page, we identify the kethat can impact stock performance.

    This analysis enhances the fundamental wor

    rest of this report, giving investors yet anothuse in their decision-making process.

    0

    20

    40

    60

    80

    100

    120

    M ar -04 M ar -05 M ar -06 M ar -07 M ar -08 M ar -09 Mar

    (%)S mp ex In ra - 3M Rea se - Vo S mp ex In r

    MSCI India - 3M Realised - Vol MSCI India -

    Sources: Bloomberg; BNP Paribas

    BNP PARIBAS

    Macro BUYUNCHANGED

    timate has a

    R27.92.timate has a

    (INR/share)-----------------------

    5% 10

    ---EBITDAmargin--- 8.5% 12.36 15.

    9.0% 16.45 19.

    9.5% 20.53 24.

    10.0% 24.62 28.

    10.5% 28.71 32.

    Source: BNP Paribas estimates

    Regression Simplex In

    30 December 2011

    ngineering &Construction

    Metals &Mining Oil & Gas IT Services

    0.61 0.62 0.51 0.43

    0.71 0.72 0.59 0.53

    1.00 0.69 0.56 0.48

    1.00 0.66 0.55

    1.00 0.50

    1.00

    Long/Short Chart

    on of the macro

    stock-price

    ttom-up factors.

    macro risks

    k laid out in the

    er resource to

    Sources: Bloomberg, BNP Paribas

    -10 M ar -11 M ar -12

    a - 6M Re a s e - V o

    6M Realised - Vol

    -33.00%

    -23.00%

    -13.00%

    -3.00%

    7.00%

    17.00%

    27.00%

    37.00%

    47.00%

    57.00%

    -14.00% -9.00% -4.00% 1.0

    Simplex Infra

    Simplex Infra = 429 + -4.747 * IRCP12M IndeR Square = 0.0096

    Regression based on 261 observations of 5the explanation of R-squareSources: Bloomberg; BNP Paribas

    2.5785189

    4.5785189

    6.5785189

    8.5785189

    10.578519

    12.578519

    Mar-09 Sep-09 Mar-10

    (x) Simplex Infra - GMR I

    Sources: Bloomberg; BNP Paribas

    Shashank Abhisheik

    6 MARCH 2012

    SIMPLEX INFRASINF IN

    -- Revenue growth --------------------------

    % 15% 20% 25%

    6 18.96 22.27 25.57

    4 23.44 26.94 30.43

    2 27.92 31.61 35.30

    1 32.39 36.28 40.16

    9 36.87 40.95 45.03

    ra to IRCP12M INDEX

    Telecom Utilities Property

    0.36 0.56 0.58

    0.41 0.62 0.70

    0.41 0.63 0.68

    0.42 0.65 0.74

    0.36 0.59 0.59

    0.29 0.46 0.43

    1.00 0.45 0.42

    1.00 0.65

    1.00

    0% 6.00% 11.00% 16.00%

    India FIMMDA INR paper rates 12m

    x

    years weekly data. Please refer to Appendix 1 for

    -2s

    -1s

    Mean

    +1s

    +2s

    Sep-10 Mar-11 Sep-11

    Infrastructure

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    Simplex Infra Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    Things starting to fall into place

    Four key points to note after the strong quarter

    1 Strong execution demonstrated by 37% y-y revenue growth; particularly positive was the overseasperformance.

    2 Execution was not at the expense of margins; EBITDA margin of 8.1% was slightly lower than our 8.5%estimate; however, adjusting for a one-time forex loss, EBITDA margin would be 20bp higher.

    3 Efforts to strengthen the balance sheet are noticeable after this quarter (working capital days and netdebt-to-equity have decreased).

    4 Only three of the 20 slow-moving projects at the beginning of FY12 are yet to ramp up.International projects join the party

    The company reported 15% growth in international revenue in 3Q12, reversing a declining trend over sevenquarters. Two large projects (a flyover in Dhaka, Bangladesh and a sugar factory in Ethiopia) have started tocontribute to revenue. International projects contribute approximately 12% of the current order book ofINR144b. In the near term, management believes that projects in Oman could be a sizeable opportunity.Oman continues to be the most promising opportunity amongst the foreign countries where Simplex has apresence.

    In Libya, the situation continues to be very fluid. Although a new government is starting to take control,whether they will honour the contracts signed with the old regime is yet to be seen. In any case, even ifthese projects are reinstated, there is very little visibility about the time frame for revival. At this time, thecompany continues to exclude projects that it had secured in Libya (worth INR7b).

    Strong pipeline of bids and negotiated contracts

    The company has been named the lowest bidder for contracts of INR25b; the letter of award (LOA) isawaited before these can be added to the order book. Management indicated that the company has bid fororders worth INR300b and has another INR40b worth of orders under negotiation. Based on this bidpipeline, we believe that the company is in a strong position to achieve the INR70b new order inflow targetfor FY12. Moreover, the bid pipeline provides comfort for FY13 order inflows as well.

    Balance sheet improving

    Management had indicated in previous quarters that managing working capital and, thereby, improvingprofitability, is a key focus area. Net working capital days declined to 120 at the end of 3QFY12 from 139 atthe end of 2QFY12 (130 at the end of FY11). Net debt-to-equity has improved to 1.46x in 3QFY12 from 1.57xin 2QFY12 (1.47x at the end of FY11). The reduction in net working capital has largely been due to areduction in inventories. Management indicated that the focus is now on reducing the collection period andlowering the receivables balance.

    3QFY12 results Execution was a pleasant surprise

    After reporting a y-y decline in international revenue for the last seven quarters the company finallyreported a healthy 15% increase in this quarter. Consequently, overall revenue increased a whopping 37%y-y. Although the order inflow during the quarter was subdued, the company has already secured an

    additional INR21b of orders during 4QFY12 and should be able to comfortably meet the order guidance ofINR60b-70b. EBITDA margin of 8.1% was lower than our estimate of 8.5%; however, excluding the foreignexchange loss of INR33m, the margin would have been 8.3%.

    Increasing estimates

    We believe that revenue guidance of 15-20% growth in FY12 is on the low side. We estimate higher revenuegrowth of 21% in FY12 based on improving execution, particularly in international projects. Additionally,management indicated that only three of the 20 slow-moving orders (at the beginning of FY12) have turnedaround and are now contributing to revenue. Management was also confident of a turnaround of theseremaining orders shortly. Management reiterated that EBITDA margin is sustainable in the 9.5-10.0% range.

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    Simplex Infra Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    EXHIBIT 1: Estimate changes

    Year-end 31 Mar -------------- 2012E -------------- -------------- 2013E -------------- -------------- 2014E --------------Old New Change Old New Change Old New Change

    (INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%)

    Revenue 51,795 57,615 11 58,549 66,355 13 65,364 72,666 11

    EBITDA 5,161 5,034 (2) 5,833 6,297 8 6,510 6,896 6

    EBITDA margin (%) 10.0 8.7 10.0 9.5 10.0 9.5

    Interest 1,854 2,336 26 1,562 2,462 58 1,875 2,444 30

    Net profit 967 811 (16) 1,457 1,382 (5) 1,522 1,641 8

    Source: BNP Paribas estimates

    Valuation

    We arrive at our TP of INR272 based on a SoTP valuation. The construction company contributes INR266based on 5.0x FY13E EV/EBITDA (implied P/E of 9.5x). The stake in the highway BOT contributes INR6 basedon our DCF valuation. Risks to our TP include deterioration in the overall infra investment environment,increase in raw material prices, and delays in anticipated interest rate cuts.

    EXHIBIT 2: Historical P/E band chart EXHIBIT 3: Historical EV/EBITDA band chart

    Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas

    Current, 8 .6

    Mean, 16.8

    Mean + 1SD,22.3

    Mean - 1SD,11.3

    Mean + 2SD,27.8

    0

    5

    10

    15

    20

    25

    30

    35

    40

    45

    Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

    (x)

    Current, 3.7

    Mean, 6.4

    Mean + 1SD,8.7

    Mean - 1SD,4.0

    Mean + 2SD,11.0

    0

    2

    4

    6

    8

    10

    12

    14

    16

    Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

    (x)

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    Simplex Infra Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    Financial statementsSimplex Infra

    Profit and Loss (INRm) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Revenue 44,476 47,557 57,615 66,355 72,666

    Cost of sales ex depreciation (18,126) (18,975) (24,375) (26,761) (29,307)

    Gross profit ex depreciation 26,350 28,581 33,239 39,593 43,358

    Other operating income 62 67 42 0 0

    Operating costs (21,972) (23,941) (28,248) (33,296) (36,462)

    Operating EBITDA 4,440 4,707 5,034 6,297 6,896

    Depreciation (1,534) (1,608) (1,781) (2,043) (2,273)

    Goodwill amortisation 0 0 0 0 0

    Operating EBIT 2,907 3,099 3,253 4,254 4,623

    Net financing costs (1,112) (1,308) (2,336) (2,462) (2,444)

    Associates 0 0 0 0 0

    Recurring non operating income 116 164 277 277 277

    Non recurring items 0 0 0 0 0

    Profit before tax 1,911 1,955 1,193 2,069 2,457

    Tax (685) (722) (382) (687) (816)

    Profit after tax 1,226 1,232 811 1,382 1,641

    Minority interests 0 0 0 0 0

    Preferred dividends 0 0 0 0 0Other items 0 0 0 0 0

    Reported net profit 1,226 1,232 811 1,382 1,641

    Non recurring items & goodwill (net) 0 0 0 0 0

    Recurring net profit 1,226 1,232 811 1,382 1,641

    Per share (INR)

    Recurring EPS * 24.78 24.91 16.39 27.92 33.14

    Reported EPS 24.78 24.91 16.39 27.92 33.14

    DPS 2.33 2.32 2.34 2.34 2.34

    Growth7

    Revenue (%) (5.1) 6.9 21.2 15.2 9.5

    Operating EBITDA (%) 2.4 6.0 6.9 25.1 9.5

    Operating EBIT (%) (4.3) 6.6 5.0 30.8 8.7Recurring EPS (%) (3.3) 0.5 (34.2) 70.4 18.7

    Reported EPS (%) (7.7) 0.5 (34.2) 70.4 18.7

    Operating performance

    Gross margin inc depreciation (%) 55.8 56.7 54.6 56.6 56.5

    Operating EBITDA margin (%) 10.0 9.9 8.7 9.5 9.5

    Operating EBIT margin (%) 6.5 6.5 5.6 6.4 6.4

    Net margin (%) 2.8 2.6 1.4 2.1 2.3

    Effective tax rate (%) 35.8 36.9 32.0 33.2 33.2

    Dividend payout on recurring profit (%) 9.4 9.3 14.3 8.4 7.1

    Interest cover (x) 2.7 2.5 1.5 1.8 2.0

    Inventory days 134.4 140.1 137.2 148.1 148.3

    Debtor days 142.0 156.4 159.9 158.5 155.3

    Creditor days 346.9 353.8 333.3 348.2 330.4Operating ROIC (%) 8.7 7.8 7.7 9.2 9.4

    Operating ROIC - WACC (%) (0.7) (1.5) (1.9) (0.3) (0.1)

    ROIC (%) 8.9 8.1 8.2 9.6 9.7

    ROIC - WACC (%) (0.5) (1.2) (1.4) 0.1 0.2

    ROE (%) 13.1 12.0 7.3 11.4 12.2

    ROA (%) 4.8 4.6 4.5 5.1 5.2

    *Pre exceptional, pre-goodwill and fully diluted

    Revenue By Division (INRm) 2010A 2011A 2012E 2013E 2014E

    Engg & Construction 44,476 47,557 57,615 66,355 72,666

    Sources: Simplex Infra; BNP Paribas estimates

    Revenue growth profile

    should remain strong

    especially sinceinternational operations are

    are at an inflection point

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    Simplex Infra Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    Simplex Infra

    Cash Flow (INR m) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Recurring net profit 1,226 1,232 811 1,382 1,641

    Depreciation 1,534 1,608 1,781 2,043 2,273

    Associates & minorities 0 0 0 0 0

    Other non-cash items 1,128 1,014 2,336 2,462 2,444

    Recurring cash flow 3,888 3,855 4,929 5,887 6,357

    Change in working capital (3,007) (4,341) (2,226) (1,789) (2,515)

    Capex - maintenance (1,225) (2,448) (2,000) (2,000) 0

    Capex - new investment 0 0 0 0 (2,000)Free cash flow to equity (345) (2,934) 703 2,097 1,842

    Net acquisitions & disposals 0 0 0 0 0

    Dividends paid (116) (115) (116) (116) (116)

    Non recurring cash flows 111 65 (115) (248) 0

    Net cash flow (350) (2,984) 473 1,733 1,726

    Equity finance 0 0 0 0 0

    Debt finance 25 2,312 1,164 (1,962) (1,944)

    Movement in cash (325) (672) 1,636 (229) (217)

    Per share (INR)

    Recurring cash flow per share 78.58 77.92 99.56 119 128

    FCF to equity per share (6.97) (59.31) 14.21 42.37 37.21

    Balance Sheet (INRm) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Working capital assets 29,726 36,053 43,236 46,601 49,540

    Working capital liabilities (17,135) (19,899) (24,857) (26 ,433) (26,857)

    Net working capital 12,590 16,154 18,379 20,168 22,683

    Tangible fixed assets 9,864 11,324 11,542 11,500 11,227

    Operating invested capital 22,454 27,477 29,922 31,668 33,910

    Goodwill 0 0 0 0 0

    Other intangible assets 0 0 0 0 0

    Investments 277 492 607 855 855

    Other assets 0 0 0 0 0

    Invested capital 22,731 27,969 30,528 32,523 34,765

    Cash & equivalents (873) (795) (2,431) (2,203) (1,985)

    Short term debt 0 0 0 0 0

    Long term debt * 13,024 16,607 20,107 20,607 21,107

    Net debt 12,151 15,812 17,676 18,404 19,121Deferred tax 0 0 0 0 0

    Other liabilities 0 0 0 0 0

    Total equity 9,697 10,777 11,472 12,738 14,263

    Minority interests 0 0 0 0 0

    Invested capital 22,731 27,969 30,528 32,523 34,765

    * includes convertibles and preferred stock which i s being treated as debt

    Per share (INR)

    Book value per share 196 218 232 257 288

    Tangible book value per share 196 218 232 257 288

    Financial strength

    Net debt/equity (%) 125.3 146.7 154.1 144.5 134.1

    Net debt/total assets (%) 29.8 32.5 30.6 30.1 30.1

    Current ratio (x) 1.8 1.9 1.8 1.8 1.9

    CF interest cover (x) 0.7 (1.2) 1.3 1.9 2.6

    Valuation 2010A 2011A 2012E 2013E 2014E

    Recurring P/E (x) * 9.0 9.0 13.7 8.0 6.8

    Recurring P/E @ target price (x) * 11.0 10.9 16.6 9.7 8.2

    Reported P/E (x) 9.0 9.0 13.7 8.0 6.8

    Dividend yield (%) 1.0 1.0 1.0 1.0 1.0

    P/CF (x) 2.8 2.9 2.2 1.9 1.7

    P/FCF (x) (32.1) (3.8) 15.7 5.3 6.0

    Price/book (x) 1.1 1.0 1.0 0.9 0.8

    Price/tangible book (x) 1.1 1.0 1.0 0.9 0.8

    EV/EBITDA (x) ** 5.0 5.1 5.2 4.4 4.2

    EV/EBITDA @ target price (x) ** 5.5 5.6 5.7 4.8 4.5

    EV/invested capital (x) 1.0 1.0 0.9 0.9 0.9

    * Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

    Sources: Simplex Infra; BNP Paribas estimates

    Net debt to equity is higher

    than peers, remains aconcern

    Company has shown an

    improvement in net

    working capital quarter-on-

    quarter

    23

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    COMPANY REPORTEQUITIES RESEARCH

    NJCC IN

    NCC LTDINDIA / CONSTRUCTION

    HOLDFROM BUYTA

    PRI

    CL

    UP

    INDUSTRY OUTLOOK

    Power plant executi

    CHANGEBalance sheet repair becomes more chall

    With additional power plant investment required

    and working capital for execution, NCCs balancestretched in the near-future, in our view. We beliprice adequately captures these risks. Core busin

    improving macro environment and lower interes

    CATALYSTFuel linkage and power supply agreement

    NCC is looking to sign long-term supply contract1,320MW capacity; Andhra Pradesh and Karnataopportunities in the near-term. Currently, the colinkages or any contract to supply its power. Hosuccessful clearance of these milestones would b

    VALUATIONReducing TP to INR59; downgrade to HOL

    We are reducing our TP to INR59 from INR70 onestimates. This decline comes from our standaloto INR24). Upside risks include achievement of kepower assets, and better execution and margin tbusiness. Downside risks are poor execution and

    KEY CHARTSoTP Valuation

    Source: BNP Paribas estimates

    Real estateinvestments

    25.4%

    BOT valuation28.8%

    CHANGE IN RECOMMENDATION

    Shashank [email protected]

    +91 22 33704336

    Visvish

    +91

    HOW WE DIFFE

    Target Price (INR)

    EPS 2012 (INR)

    EPS 2013 (INR)

    P

    Market Recs

    RGET

    IOR TP

    SE

    /DOWNSIDE

    INR59.00

    INR70.00

    INR59.80

    -1.3%

    n is key

    nging

    both by way of equity

    sheet is likely to remaineve the current shareess will benefit from an

    rates.

    are key catalysts

    for at least 75% of itsa are two majorpany has no firm fuel

    ever, any news flow one positive.

    0% lower FY13e valuation (from INR35

    y milestones on itsan expected in the core

    delays in equity funding.

    Standalone40.7%

    Power projects5.1%

    hal Sharma, [email protected]

    22 33704377

    KEY STOCK DA

    YE Mar (INR m)

    Revenue

    Rec. net profit

    Recurring EPS (INR)

    Prior rec. EPS (INR)

    Chg. In EPS est. (%)

    EPS growth (%)

    Recurring P/E (x)

    Dividend yield (%)

    EV/EBITDA (x)

    Price/book (x)

    Net debt/Equity (%)

    ROE (%)

    Share price performan

    Absolute (%)

    Relative to country (%)

    Next results

    Mkt cap (USD m)

    3m avg daily turnover (

    Free float (%)

    Major shareholder

    12m high/low (INR)

    3m historic vol. (%)

    ADR ticker

    ADR closing price (USD)

    Issued shares (m)

    Sources: Bloomberg cons

    14

    34

    54

    74

    94

    114

    Mar-11 Jun-11

    (INR) NCC Ltd

    R FROM THE STREET

    BNPP Consensus % Diff

    59.00 64.00 (7.8)

    2.21 2.86 (22.7)

    4.80 4.32 11.1

    ositive Neutral Negative

    21 9 10

    6 MARCH 2012

    A

    2012E 2013E 2014E

    51,609 59,345 69,324

    572 1,242 1,666

    2.21 4.80 6.43

    4.44 5.39 6.27

    (50.2) (11.0) 2.7

    (65.3) 116.7 34.1

    27.0 12.5 9.3

    2.1 2.1 2.1

    8.9 7.5 6.9

    0.6 0.6 0.6

    99.6 106.3 112.3

    2.4 5.1 6.5

    e 1 Month 3 Month 12 Month

    (3.3) 50.8 (42.5)

    (2.7) 45.7 (36.6)

    May 2012

    312

    USD m) 1.7

    80

    Promoter Group (20%)

    116.00/32.50

    70.9

    -

    -

    258

    ensus; BNP Paribas estimates

    (79)

    (69)

    (59)

    (49)

    (39)

    (29)(19)

    (9)

    1

    11

    Sep-11 Dec-11 Ma r-12

    (%)Rel to MSCI India

    24

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    NCC Ltd

    RISK EXPERT

    Key Earnings Drivers & Sensitivity

    A 5% change in our FY13 revenue growth estiimpact on our FY13 EPS of INR4.80.A 50bp change in our FY13 EBITDA margin es

    impact on our FY13 EPS estimate.

    NCC Ltd and MXIN Index(3M and 6M Realised-Vol)

    India Sector Correlation Matrix at

    India Autos Banks Engi

    Autos 1.00 0.66

    Banks 1.00

    Engineering & Construction

    Metals & Mining

    Oil & Gas

    IT Services

    Telecom

    Utilities

    Property

    Source: BNPP Paribas Sector Strategy

    The Risk Experts

    Our starting point for this page is a recogniti

    factors that can have a significant impact on

    performance, sometimes independently of b

    With our Risk Expert page, we identify the kethat can impact stock performance.

    This analysis enhances the fundamental wor

    rest of this report, giving investors yet anothuse in their decision-making process.

    0

    20

    40

    60

    80

    100

    120

    140

    M ar -04 M ar -05 M ar -06 M ar -07 M ar -08 M ar -09 Mar

    (%)NCC Lt - 3M Rea se -Vo NCC Lt -

    MSCI India - 3M Realised - Vol MSCI India

    Sources: Bloomberg; BNP Paribas

    BNP PARIBAS

    Macro HOLDFROM BUY

    mate has a 12%

    timate has a 16%

    FY13E EPS -----------

    (INR/share) 5.0%

    EBITDAmargin

    8.0% 2.20

    8.5% 2.90

    9.0% 3.60

    9.5% 4.30

    10.0% 5.00

    Source: BNP Paribas estimates

    Regression NCC Ltd to

    30 December 2011

    ineering & Construction Metals & Mining Oil & Gas IT Servi

    0.61 0.62 0.51 0

    0.71 0.72 0.59 0

    1.00 0.69 0.56 0

    1.00 0.66 0

    1.00 0

    1

    Long/Short Chart

    on of the macro

    stock-price

    ttom-up factors.

    macro risks

    k laid out in the

    er resource to

    Sources: Bloomberg, BNP Paribas

    -10 M ar -11 M ar -12

    6M Re a s e - V o

    - 6M Realised -Vol

    -45.00%

    -35.00%

    -25.00%

    -15.00%

    -5.00%

    5.00%

    15.00%

    25.00%

    35.00%

    45.00%

    -14.00% -9.00% -4.00% 1.0

    NCC Ltd

    NCC Ltd = 151 + - 1.0587 * IRCP12M IndexR Square = 0.0082

    Regression based on 261 observations of 5the explanation of R-squareSources: Bloomberg; BNP Paribas

    0.42

    0.62

    0.82

    1.02

    1.22

    1.42

    1.62

    1.82

    2.02

    Mar-09 Sep-09 Mar-10

    (x) NCC Ltd - IVRCL Ltd

    Sources: Bloomberg; BNP Paribas

    Shashank Abhisheik

    6 MARCH 2012

    NCC LTDNJCC IN

    --------- Revenue growth --------------------

    10.0% 15.0% 20.0% 25.0%

    2.73 3.27 3.80 4.33

    3.47 4.03 4.60 5.16

    4.20 4.80 5.40 6.00

    4.93 5.56 6.19 6.83

    5.66 6.33 6.99 7.66

    IRCP12M INDEX

    es Telecom Utilities Property

    .43 0.36 0.56 0.58

    .53 0.41 0.62 0.70

    .48 0.41 0.63 0.68

    .55 0.42 0.65 0.74

    .50 0.36 0.59 0.59

    .00 0.29 0.46 0.43

    1.00 0.45 0.42

    1.00 0.65

    1.00

    0% 6.00% 11.00% 16.00%

    India FIMMDA INR paper rates 12m

    years weekly data. Please refer to Appendix 1 for

    -2s

    -1s

    Mean

    +1s

    +2s

    Sep-10 Mar-11 Sep-11

    25

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    NCC Ltd Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    Downgrading to HOLD on weakening balance sheet

    Balance sheet repairs could take longer than anticipated

    NCC has a net debt to equity ratio of close to 1x on its standalone balance sheet and working capital of 0.6xtrailing 12-month revenue. One solution to improve their stretched balance sheet, in our view, is to sellstakes in their investments. The company has INR17.5b of investments, loans and advances to itssubsidiaries in real estate, power, highway BOTs and construction subsidiaries and associates. The totalexposure to real estate is approximately INR7.9b and highway BOT is INR6.8b. In our view, management is

    currently more focused on selling stakes in its power assets to fund its equity rather than repair its balancesheet by monetizing their real estate and other BOT assets. Consequently, the standalone balance sheetcould remain stretched in the near-term.

    Equity requirements in power plants could lead to dilution

    NCCs Sompeta power plant project was cancelled as environmental approvals for the project wererevoked. The company subsequently purchased a 55% stake in a 1,320MW coal-based thermal project fromNelcast Energy Corp [NELC IN, Not rated]. Gayatri Projects [GAYP IN, Not rated] is the other partner in theproject (45%). Together, the two have paid INR2.7b for their purchase, of which NCC has contributedINR1.5b. This consideration was paid against the land acquired and the clearances obtained so far. Theproject requires total debt of INR52.85b. The terms of financing require the company to contract at least75% of its total generation by way of long-term power purchase agreements (PPA). So far, NCC has not tiedup any of its generation via long-term supply agreements (the earlier PPA with Karnataka has been

    cancelled by the government), but is hopeful that it will be able to competitively bid and win in AndhraPradesh (Case 1 bidding), its home state.

    Total equity required is INR17b, of which NCCs share is INR9.5b (INR3.3b by FY11, and the remaining over afour-year period). The company has so far invested INR1.5b. The company is planning to fund this usingproceeds from dilution at its NCC Infra holding company level, and margins from the EPC construction ofthis project. During 3QFY12, the company recorded the EPC order from this project in its order book(INR52b) and expects to make 10% EBITDA margins over the four year period (INR5.2b of EBITDA is possiblefrom this project over the execution period).

    The company is looking to Chinese equipment manufacturers for this project. The earlier environmentalclearance was obtained based on usage of 100% imported coal. NCC has now filed for a modification of thatclearance to allow them to use up to 70% domestic coal. The company has applied to Coal India to transfer

    its earlier linkage to its new project.

    Working capital requirements likely to increase

    With the addition of the power project (INR52b, or 24% of current order book), we believe the company willrequire incremental working capital. The advance raised from this project was used to fund its share ofequity in the project. Therefore, we expect the company will have to borrow short-term debt when theexecution of this project commences to fund its working capital. Assuming a four-year execution, and a 25%working capital requirement, NCC will need at least INR3.25b of additional debt (13% of its current debt) tofund this execution, which should further stretch its balance sheet.

    Real estate investments yet to pay off

    The company has INR7.9b locked in real estate subsidiaries and associates, including INR4.2b in the form of

    loans and advances. We think management is more focused on its power venture at this point and has notdedicated sufficient time to monetize this portion of its investments. Also, it does not appear thatmanagement has any near-term plans to encash this investment to reduce its debt.

    EXHIBIT 1: Summary of 2011 investments

    Real estate Power BOT - Road Construction Others Total

    (INR m) (INR m) (INR m) (INR m) (INR m) (INR m)

    Equity 2,079 11 6,676 634 970 10 370Loans 4,164 674 112 527 - 5,477

    Debenture 1,211 - - - - 1,211

    Pref Shares 428 - - - - 428

    Total 7,881 684 6,788 1,161 970 17,485

    Sources: NCC Ltd; BNP Paribas

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    NCC Ltd Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    3QFY12 EBITDA margins disappoint, in line with other mid-cap peers

    During 3QFY12, the company reported an EBITDA margin of 6.1% compared to 9.6% last year, mainly due toa slowdown in execution and a INR150m provision for certain cost overruns (lying in recoverable advances).The execution slowdown was due to deferral of milestone-based payments on certain projects, whichformed 10-15% of their current order book. Broadly, lower turnover, under-recoveries of fixed costs, andthe provision equally contributed to the decline in margins y-y. The positive side of provisioning is that thecompany has anticipated these losses and written them off during 3QFY12 which should reduce downsiderisks in future earnings from some of its contentious claims on cost overruns. We experienced such

    provisioning of anticipated losses with other peers in the industry.

    Changing estimates due to higher interest costs

    We are changing our estimates for FY12-14 by-1% to +20% in revenue and -50% to 4% in PAT. In FY12, ourPAT estimates decline by 50% mainly due to the incorporation of 3QFY12 performance and lower guidanceby the company. The company lowered its guidance for revenue to INR52b-53b on a standalone basis fromINR58b, which was in line with our expectations. However, NCC negatively surprised us on the EBITDAmargin by guiding 8.5% for FY12 compared to our expectation of 9.8%. Consequently, our FY12 PATestimates decline by 50%.

    For FY13, we are expecting 15% revenue growth (INR59b) and a 9% EBITDA margin. However, we nowestimate that the company will incur higher interest costs because of higher debt required to fund workingcapital. Consequently, our PAT estimates decline by 10% to INR1.2b.

    For FY14, although we have increased our revenue expectation by 20% to INR69b or 17% y-y growth, ourPAT expectation has increased only 4% due to lower estimated EBITDA margin and higher interest costs.

    EXHIBIT 2: Change in Estimates

    YE 31 Mar ------------------- 2012E ------------------- ------------------- 2013E ------------------- ------------------- 2014E -------------------Old New Change Old New Change Old New Change

    (INR m) (INR m) (%) (INR m) (INR m) (%) (INR m) (INR m) (%)

    Revenue 52,197 51,620 (1) 55,009 59,345 8 57,712 69,324 20

    EBITDA 5,098 4,300 (16) 5,327 5,343 0 5,582 6,243 12

    EBITDA margin (%) 9.8 8.3 9.7 9.0 9.7 9.0

    Interest 2,680 2,700 1 2,438 2,624 8 2,247 2,776 24

    Net profit 1,137 572 (50) 1,378 1,242 (10) 1,603 1,666 4

    Net margin (%) 4.0 1.1 4.1 2.1 2.8 2.4

    Sources: NCC Ltd; BNP Paribas estimates

    Reducing valuation on lower estimates

    We are reducing our TP to INR59 from INR70 on 10% lower FY13 estimates. The entire decline in TP is fromour standalone valuation which declines from INR35 to INR24. The standalone company is valued at 6.2xFY13E EBITDA (implied P/E of 4.9x); our multiple is one standard deviation below the historical mean. Weare maintaining our non-standalone valuation intact; power projects at INR3 on 1x investment, real estateinvestments at INR15 at 0.5x investments, and highway BOTs at INR17 using DCF at 13.5% COE. Downsiderisks to our recommendation and TP include slower than expected execution or lower margins in its coreconstruction business, delays in execution of its BOTs or power assets. Upside risks to our recommendation

    include timely achievement of milestones in its power plant, stake sale in its BOT assets, higher thanexpected orders, revenue or margins in its core business.

    EXHIBIT 3: Change in TP

    --------------------- Old --------------------- --------------------- New -------------------- Change Comments

    Method Assumptions Contribution Method Assumptions Contribution (%)

    (INR) (INR)

    Standalone EV/EBITDA 6.0x 1-yearforward

    EBITDA(implied P/E of

    6.4x)

    35 EV/EBITDA 6.2x 1-yearforward

    EBITDA(implied P/E of

    4.9x)

    24 (31.4)

    Power projects Book value 1.0x BV 3 Book value 1.0x BV 3 -

    Real estate investments Book value 0.5x BV 15 Book value 0.5x BV 15 -

    BOT valuation DCF 13.5% CoE 17 DCF 13.5% CoE 17 -

    Target price 70 59 (16)

    Source: BNP Paribas estimates

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    NCC Ltd Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    EXHIBIT 4: Historical P/E EXHIBIT 5: Historical EV/EBITDA

    Sources: Bloomberg; BNP Paribas Sources: Bloomberg; BNP Paribas

    The stock has de-rated from its highs in the past few years primarily due to balance sheet deteriorationand decisions to invest outside their core business going wrong. We believe this de-rating is likely to

    reverse if the company consistently delivers earnings growth over 2-3 quarters.

    Current, 11.4

    Mean, 15.0

    Mean + 1SD,28.5

    Mean - 1SD,1.6

    Mean + 2SD,41.9

    0

    10

    20

    30

    40

    50

    60

    Feb-05

    Feb-06

    Feb-07

    Feb-08

    Feb-09

    Feb-10

    Feb-11

    Feb-12

    (x)

    Current, 4.7

    Mean, 10.2

    Mean + 1SD,14.3

    Mean - 1SD,6.1

    Mean + 2SD,18.4

    0

    5

    10

    15

    20

    25

    30

    Feb-05 Feb-06 Feb-07 Feb-08 Feb- 09 Feb-10 Feb-11 Feb-1

    (x)

    28

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    NCC Ltd Shashank Abhisheik

    BNP PARIBAS 6 MARCH 2012

    Financial statementsNCC Ltd

    Profit and Loss (INRm) Year Ending Mar 2010A 2011A 2012E 2013E 2014E

    Revenue 47,753 50,674 51,609 59,345 69,324

    Cost of sales ex depreciation (40,133) (42,221) (43,063) (49,097) (57,359)

    Gross profit ex depreciation 7,620 8,453 8,546 10,248 11,965

    Other operating income 25 63 12 0 0

    Operating costs (2,811) (3,640) (4,257) (4,906) (5,723)

    Operating EBITDA 4,834 4,876 4,300 5,343 6,243

    Depreciation (525) (685) (825) (938) (1,052)

    Goodwill amortisation 0 0 0 0 0

    Operating EBIT 4,309 4,191 3,476 4,404 5,190

    Net financing costs (1,322) (1,682) (2,700) (2,624) (2,776)

    Associates 0 0 0 0 0

    Recurring non operating income 48 146 77 80 80

    Non recurring items 591 0 0 0 0

    Profit before tax 3,626 2,656 853 1,860 2,494

    Tax (1,109) (1,021) (281) (618) (829)

    Profit after tax 2,517 1,635 572 1,242 1,666

    Minority interests 0 0 0 0 0

    Preferred dividends 0 0 0 0 0Other items 0 0 0 0 0

    Reported net profit 2,517 1,635 572 1,242 1,666

    Non recurring items & goodwill (net) (591) 0 0 0 0

    Recurring net profit 1,926 1,635 572 1,242 1,666

    Per share (INR)

    Recurring EPS * 7.87 6.37 2.21 4.80 6.43

    Reported EPS 10.28 6.37 2.21 4.80 6.43

    DPS 1.35 1.29 1.28 1.27 1.27

    Growth

    Revenue (%) 15.9 6.1 1.8 15.0 16.8

    Operating EBITDA (%) 29.4 0.9 (11.8) 24.2 16.8

    Operating EBIT (%) 34.5 (2.7) (17.1) 26.7 17.8Recurring EPS (%)

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