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From cyclical to secular growth Financial summary Source: *Consensus broker estimates, Company, ENAM estimates Source: ENAM Research, Bloomberg Relative Performance Shareholding (%) Jun-07 QoQ chg Promoters : 0.0 0.0 FIIs : 17.8 (0.4) MFs / UTI : 15.8 0.8 Banks / FIs : 22.4 0.2 Others : 43.9 (0.5) Stock Data No. of shares : 284mn Market cap : Rs 691bn 52 week high/low : Rs 2735/ Rs 1136 Avg. daily vol. (6mth) : 1mn shares Bloomberg code : LT IN Reuters code : LART.BO Relative to Sector: Outperformer Larsen & Toubro India Research Rs 2,432 Target Price: Rs 2,923 Potential Upside: 20% August 11, 2007 0 100 200 300 Jun-06 Dec-06 Jun-07 Sensex L&T Y/E March Sales (Rs mn) PAT (Rs mn) Consensus EPS* (Rs.) EPS (Rs.) Change (YoY %) P/E (x) RoE (%) RoCE (%) EV/EBITDA (x) DPS (Rs) 2007 206,809 17,615 - 60.3 25 26.8 28.1 25.8 16.5 14.9 2008E 267,293 22,818 78.1 78.2 30 31.1 26.9 25.4 18.5 17.0 2009E 342,846 29,400 102.1 100.7 29 24.2 27.5 27.6 14.4 20.0 20010E 423,118 37,672 134.8 129.0 28 18.8 27.8 29.6 11.4 25.0 Bhavin Vithlani [email protected] (+91 22 6754 7634) Associate: Akshen Thakkar [email protected] Shreya Doshi [email protected] (+91 22 6754 7646)
Transcript
Page 1: Larsen & Toubro - Enam

1

From cyclical to secular growth

Financial summary

Source: *Consensus broker estimates, Company, ENAM estimates

Source: ENAM Research, Bloomberg

Relative Performance

Shareholding (%) Jun-07 QoQ chg

Promoters : 0.0 0.0 FIIs : 17.8 (0.4)MFs / UTI : 15.8 0.8 Banks / FIs : 22.4 0.2 Others : 43.9 (0.5)

Stock DataNo. of shares : 284mnMarket cap :Rs 691bn52 week high/low :Rs 2735/ Rs 1136Avg. daily vol. (6mth) : 1mn sharesBloomberg code : LT INReuters code : LART.BO

Relative to Sector: Outperformer

Larsen & Toubro

India Research

Rs 2,432Target Price: Rs 2,923

Potential Upside: 20%

August 11, 2007

0

100

200

300

Jun-06 Dec-06 Jun-07

Sensex L&T

Y/E MarchSales

(Rs mn)PAT

(Rs mn)Consensus EPS* (Rs.)

EPS (Rs.)

Change (YoY %)

P/E (x)

RoE (%)

RoCE (%)

EV/EBITDA (x)

DPS (Rs)

2007 206,809 17,615 - 60.3 25 26.8 28.1 25.8 16.5 14.92008E 267,293 22,818 78.1 78.2 30 31.1 26.9 25.4 18.5 17.02009E 342,846 29,400 102.1 100.7 29 24.2 27.5 27.6 14.4 20.020010E 423,118 37,672 134.8 129.0 28 18.8 27.8 29.6 11.4 25.0

Bhavin [email protected] (+91 22 6754 7634)

Associate: Akshen [email protected]

Shreya [email protected] (+91 22 6754 7646)

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Table of contents

Slide No.

Investment Summary 3

Building a robust business model 5

New business initiatives are key long term earnings drivers 6

Existing businesses have a strong foothold 13

Subsidiaries with value unlocking potential 18

Key Risk/Concerns 23

Valuation 24

Company Financials 26

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Investment summaryVisibility enhanced beyond FY10

L&T’s initiatives in high RoI defense, power plant equipments, nuclear, shipbuilding and railway businesses are key earnings drivers beyond FY10

Existing businesses have a strong foothold Order flows in infrastructure business to accelerate–Outlay of USD 350bn over 2007-2012E i.e. 24% CAGRIndustrial capex of USD 200bn over FY07-12 i.e. 25% CAGR, mostly greenfieldPetro dollars driving GCC’s USD 1.4trn capex

Margins to improve by 110bps over FY07-10EImproving quality of order backlog Ability to optimally allocate key resources Favorable business environment

RoI to expand over the long term Rising contribution from manufacturing, I.T and new businesses

L&T IDPL and L&T Infotech– potential value unlocking opportunities

At CMP (Rs 2,432), adj. for IDPL and investments, the core business trades at 12.9x FY09E and 10.3x FY10E EV/EBITDA

New businesses (ROI –30%)

IT(ROI – 30%)

Manufacturing(ROI-25%)

E & C (ROI – 18%)

2010E2007 2012E

3%

66%

24%

8%

ROI

11%

54%

20%

15%

10%

23%

5%

62%

E&C Business Cycle

New businesses to cover E&C cyclicality

L&T’s Business trajectory

IT, defense and power – secular businesses

Time

Gro

wth

2007 2012

Source: Company, ENAM Research

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SOP Valuation

-2,923 Value per Share (Rs)

-34 Less Debt FY10

based on ENAM TP of Rs 946

12x FY10E EPS

12x FY10E EPS

3x P/BV

12.5x of FY10E EV/EBITDA

Comments

46

89

218

230

2,373

Value per share

Value of 11.5% stake of Ultratech Ltd

L&T Finance (Financing construction equipments)

L&T Infotech (Product engg., Energy/ Petchem, Mfg.)

IDPL ( BOT projects)

Core Business

Particulars

Cost Equity Stake (%)

L&T equity

IRR (%)

on BV of equity

EV (Rsbn)

Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8

Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7

Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230Source: Company, ENAM Research

L&T IDPL (BOT Projects)

SOP -> Rs2,923

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5

Building a robust business model

We believe L&T is well geared to double its revenues to USD 10bn by 2010 by riding the domestic infra and corporate capex boom and Middle East hydrocarbons & construction boom

L&T’s strategy for mitigating cyclicality in existing businesses, in order to drive topline to USD 16bn by 2012, is to focus largely on technology oriented high RoI businesses

Leveraging on its core engineering and construction strength, L&T has narrowed down on 5 new businesses, which it would be able to scale up to a “critical mass”L&T targets USD 1bn in revenues from each of the above mentioned five businesses

30%

30%

25%

18%

3%3%

20102007 2012

66%66%

24%24%

8%8% 10%10%

23%23%

5%5%

11%11%

54%54%

20%20%

15%15%

62%62%

73%

36%

20%

20%

FY07-12E CAGR (%)ROI Sales 2012E

( Rs bn)

94

72

124

340

5 New biz. *

IT/ Fin

Mfg.

E&C

We expect L&T to clock USD 16bn in revenues by 2012

Total 25% 631

* 5 new businesses such as defense, thermal power equipment, shipbuilding, nuclear and railways

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New business initiatives –Key long term earnings drivers

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New15%

Existing85%

Thermal power equipments ShipbuildingDefense

Larsen & Toubro – Foray into five new potential billion dollar businesses

Nuclear power Railways

20GW of supercritical projects to be awarded over the next five years

(Rs bn) 2007 2012ERevenue NA 27 EBITDA NA 4.0

World shipbuilding order book has been growing at 29% over 2003-06. Current global market estimated at USD 20bn

(Rs bn) 2007 2012ERevenue NA 25 EBITDA NA 6.2

Expect 40GW of Nuclear projects to be awarded

by 2007-2012

(Rs bn) 2007 2012ERevenue NA NA EBITDA NA NA

•Indian Railways to spend USD 68bn for

modernization, expansion, freight

corridor, etc.

(Rs bn) 2007 2012ERevenue NA NA EBITDA NA NA

DOFA estimates India’s defense market to reach USD 30bn by 2012 from

USD 10bn in 2007

(Rs bn) 2007 2012ERevenue 6 42 EBITDA 1.5 8.4

New businesses: Opportunity snapshot

Key drivers for 2010-2012 Drivers beyond 2012

Power29%

Defense44%

Ship building27%

Source: Company, ENAM Research

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Defense45%

L&T’s strategy is to specifically target the imported equipmentsCurrently ~50% of the USD 10bn defense capital procurements are importedAcquired Spectrum, a defense R&D company with capabilities in strategic electronics and AerospaceAwaiting Raksha Udyog Ratna status (RUR) from govt. for commencing its operations on a full scale

MoU signed with EADS and Boeing for offsetsGovt. has mandated 30% domestic content under an “offset clause” for any foreign defense or aviation related purchases

L&T is building ‘Pinaka’ rocket launchers for two regiments of Indian army and is bidding for the USD 4bn modernization project of Bofors guns

Industry size 2007 ( Rs bn)

Manufacturing missile guiding systems, rocket launchers, etc.Weapon System & Sensors Radar Platforms, Sonar Systems & Electronic Warfare SystemsDeveloping products with DRDO

Industry growth(FY07-12E)

India’s defense mkt. stands to USD 21.7bn in FY07.DOFA estimates India’s defense market at USD 100bn and an offset opportunity of USD10bn over next 5 years

L&T FY08ESales (Rs bn)

L&T market share by 2012

L&T growth YoY

Defense: Sales and EBITDA trends

45 34% 8.1 3% 47%

Scope of work Drivers

Estimated ROI

40%

We expect L&T to clock USD 900mn in revenues by 2012 with an OPM of 25%

0

10

20

30

40

50

FY07 FY10E FY12E

(Rs mn)

Sales EBITDA

Page 9: Larsen & Toubro - Enam

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Power plant equipment29%

Industry size 2007 ( Rs bn)

Captive & Cogen power plantsRenovation and modernization (R&M)Operation and maintenance (O&M)Balance of plant and EPCForaying into manufacturing boilers & turbines

Industry growth(FY07-12E)

As per XIth plan, 68GW of generation capacity is to be commissioned by 2012Of the above, 47GW of thermal projects are yet to be awarded. Of these ~50% of these are based on super critical technology

L&T FY08Esales (Rs bn)

L&T market share by 2012

L&T growth YoY

PPE: Business Economics

230 15% NA 20% NA

Scope of work Drivers

Estimated ROI

30%

We expect peak revenues at Rs 40bn and a sustainable OPM of 18%

Particulars (Rs mn)Capex for fixed assets 16,000Peak revenues 56,000EBIT @ sustainable margin of 15% 8,400PAT @ sustainable PATM of 10% 5,600Wkg cap requirement @ 20% of sales 11,200Assumed asset turns 3.5Sustainable ROI (%) 31Sustainable ROE at D:E of 1:1 (%) 41

Source: Company, ENAM Research

L&T is setting up a 3,000MW super critical boilers & turbines manufacturing facility50:50 JV with Mitsubishi for supercritical boilers and Toshiba for supercritical turbine generators (yet to be decided)

We expect ~20,000MW of super critical based plants to be ordered over the next 5 yearsBoilers + turbine generators form 45% of a thermal power plantL&T’s current scope involves 55% of project cost ie balance of plant related EPC

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Shipbuilding

L&T plans to leverage its high pressure vessels manufacturing capability for manufacturing LNG carriers up to 3,00,000 DWT

Submarines and frigates for the Indian NavyScorpene submarines : Indian Navy to build 24 such vessels at estimated cost of USD 14-16bnLarger frigates and submarines are currently being imported ; L&T is targeting this area

Offshore platforms JV with Sapura Crest, Malaysia for sub-sea pipe laying and installation of platforms

27%

Global industry size

2007 ( Rs bn)

LNG carriers and VLCC Submarines and Frigates for Indian NavyOffshore process platforms

Industry growth(FY07-12E)

Navy spend on ships currently at Rs 55bnCommercial shipbuilding to grow @ 15% to USD 22bn by 2020USD 15bn E&P capex for KG basin

L&T FY08ESales (Rs bn)

L&T market share by 2012

L&T growth YoY

1600 30% 2 < 1% 88%

Scope of work Drivers

Estimated ROI

25%

Excluding subsidies, we believe high-end shipbuilding can earn 25% RoI

Business EconomicsParticulars (Case without Subsidies) (Rs mn)Capex for fixed assets 20,000Peak revenues 50,000EBIT @ sustainable margin of 20% 10,000PAT @ sustainable PATM of 13% 6,500Wkg cap requirement @ 35% of sales 17,500Assumed asset turns 2.5Sustainable ROI 27Sustainable ROE at D:E of 1:1 35Source: Company, ENAM Research

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Nuclear power projectsIndustry order

inflows 2007 (MW)

Construction of reactor core, civil construction and balance of plant Technological capability in Light water (LWR) , Pressurized heavy water (PHWR) , Fast breeder (FBR)

Industry order inflows

FY07-12E (MW)

INDO-US nuclear treaty to be a big positive for the sector; NPCIL to double its target to 40GW by 2020.L&T to be a preferred contractor, considering its previous experience.

L&T FY08ESales (Rs bn)

L&T market share by 2012

L&T growth YoY

500 12,800* NA 10% NA

Scope of work Drivers

Estimated ROI

30%

L&T is the only Indian player with the technology for a nuclear reactor

Business economics

Particulars (Rs mn)Capex for fixed assets 10,000Peak revenues 40,000EBIT @ sustainable margin of 15% 6,000PAT @ sustainable PATM of 9% 3,600Wkg cap requirement @ 20% of sales 8,000Assumed asset turns 4.0Sustainable ROI 33Sustainable ROE at D:E of 0.5:1 40Source: Company, ENAM Research, * As per NPCIL plan of 20GW addition by 2020

Indo-US treaty to be a big positive for the sectorNPCIL to order additional USD14bn worth of 32 nuclear reactors of 1GW each at 4 sites of 8GWL&T’s export potential opened up post Indo-US nuclear deal.

Current technologies developed through in-house R&DCurrently caters to ~55-60% of the scope of work associated with a nuclear power plant project

Exploring tie-ups with global majors such as Areva, Toshiba's Westinghouse Electric, GE, etc.

Page 12: Larsen & Toubro - Enam

12

Railways

Indian Railways has staged a dramatic turnaround in recent years and is expected to post a revenues surplus of Rs 200bn in FY07

Indian Railways (IR) has seen a turnaround in its performance in the last three yearsIR has an outlay of Rs 2.7trn during 2007-12 as compared to Rs 798bn during FY2002-07 IR is planning significant up-gradation in close co-ordination with the private sector wherever possible

L&T has been working closely with the Ministry of Railway for the designing of Dedicated Freight Corridors

L&T is targeting the BOOT opportunity in freight corridor and port connectivity projects

Railway electrificationTrack laying and bridge constructionTraffic facilitiesRolling stockSignaling and telecom worksMetro rails

Development of dedicated freight corridorsUpgradation of signaling and telecommunications systems Augmentation of capacity for Rolling Stock manufacturing Metro rail for cities like Mumbai, Bangalore and Hyderabad.

Railway: Plan outlayL&T’s target scope of work Opportunity for private players

Opportunity in Railways could be as large as roads

110136 141

190

300

50

100

150

200

250

300

FY04 FY05 FY06 FY07R FY08E

(Rs bn)

Source: Budget DocumentsSource: Company, ENAM Research

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Existing businesses have a strong foothold

Page 14: Larsen & Toubro - Enam

14

Estimated CAGR of 25% in domestic investments over FY08-12E

Source: Crisinfac, ENAM Research

Driven by a surge in domestic capex…

Private Sector Dominated

Public – Private Partnership

Public Sector Dominated

Economic Slowdown Rising interest ratesIncreasing lead time for equipments

Rising interest ratesTraffic growth

Collection risk

High commodity prices High utilization levelsAvailable natural resources

Movement of goods – Urbanization/ Globalization

Power shortage

Investor Class DampenersDrivers

Rs bn FY03-FY07 FY08-FY12E CAGR (%)Industrial Capex 1,584 4,914 25%Steel 141 1,000 48%Aluminum 20 205 59%Cement 60 400 46%Paper 56 148 21%Fertilisers 40 93 18%Textiles 26 60 18%Petrochemicals 20 200 58%Oil & gas 1,040 2,498 19%Automobiles 181 310 11%

Rs bn FY03-FY07 FY08-FY12E CAGR (%)Infrastructure 3,511 10,500 24%Roads 1,225 3,687 25%Airports 41 408 58%Railways 797 2,714 28%Ports 337 870 24%Real Estate 1,111 2,821 20%

Rs bn FY03-FY07 FY08-FY12E CAGR (%)Power 2,765 9,637 28%Power Generation 1,798 5,367 24%Power T & D 967 4,270 35%

Capex and Growth Trends

Page 15: Larsen & Toubro - Enam

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L&T International FZE

Middle East

Hydrocarbons & InfrastructureSaudi Arabia, Oman, UAE, Qatar, Kuwait

Coal GasificationElectrical std productsSourcing & Global Manufacturing

China

0

200

400

600

800

Cons

truc

tion

Oil&

Gas

Petc

hem

Pow

er

Indu

stry

Wat

er&

Was

te

(USD bn)

Underway Advanced planning stage Early planning stage

Robust outlook for GCC nationsNational income avg. 19% growth in 2002-06GCC governments added almost USD 500bn to net foreign assets over 2002-06

USD 1.25 trillion in planned public and private projects over 2007-12E

USD 330bn in oil & gas and power sectors -L&T’s forte

L&T has expanded capacities in anticipation of growth

Modular fabrication facility in Oman for servicing offshore, refining, petchem and chemical sectorsElectrical switchgear & switchboard facility in China for servicing demand from the housing segment

L&T has now moved up the value chain and is a Tier 2 player for the Middle East

Expect revenues to double to USD 2bn by 2010

Petro dollars are fuelling infra spend in GCC

Source: Company, NBK Economic Research, ENAM Research

Key International Operations

… further aided by the boom in GCC & China

Page 16: Larsen & Toubro - Enam

16

Changing sector dynamics to favor L&T

Avg. order size for ~4.5K kms of BOT roads to increase to ~300kms from ~100kms earlierPrivatization of Ports and Airports30GW of 12th plan Hydroprojects to be ordered in 11th

plan

Changing sector dynamics …

India Inc on greenfield addition spree: Steel: 25 MMTPA over 2007-12Aluminum: 1 MMTPA over 2007-12Cement: 100MMTPA over 2007-12

Upstream exploration capex of USD 30bn by RIL, ONGC & others for KG discoveryPSU refiners to add 86MMTPA during 2007-12RIL & IOC to spend USD 5bn for Petchem expansion

InfrastructureInfrastructure HydrocarbonsHydrocarbons IndustrialIndustrial

….to benefit L&T

Corporate clients are incrementally favoring large organized players like L&T for timely delivery and quality control

Oil & gas requires complex engg. skills and very few Indian players such as L&T have the pre-qualification and the balance sheet to handle large projects

Rising order size to reduce competitive intensity and improve margin profileIncreased net worth norms

Corporate capex is adequate to meet demand growth

Rs 152bnEst. revenues

by 2010 Rs 142bn Rs 69bn

Share of revenues by 2010 36% 34% 17%

Page 17: Larsen & Toubro - Enam

17

Manufacturing: Key profitability contributor

Refinery and fertilizer plant modernization in IndiaShipbuilding and nuclear reactorsRefineries, petrochemical & fertilizer plants in Middle EastCoal gasification projects in China, South America & Middle East

Sector opportunity

Domestic construction boomUp-tick in mining activitiesLarge capex in user industries like cement, coal, iron ore, wind energy, paper

Infrastructure & real estate boom in India & Middle EastDomestic power programs like rural electrification etc Upsurge in corporate capex NHDP program fueling growth for petrol dispensing stations

Rs 29bnEst. revenues

by 2010

Heavy EngineeringHeavy Engineering Electricals &Electronics

Electricals &Electronics

Machinery & Industrial Products

Machinery & Industrial Products

Rs 40bn Rs 35bn

L&T’s initiatives

Adding distributorship with Komatsu mining eqip., ScaniaMultiaxle trucksJV in China for valves manufacturingAugmenting production/ servicing capacity

Electrical products facility in China for global sourcingNew facility in Coimbatore for electrical systems & products, and petrol dispensing pumps & systems

Capacity augmentation at Mumbai & Coimbatore plantsFocusing on high margin complex Aviation, Aerospace & Defense sectors.Export thrust

Share of revenues by 2010

FY07-10 revenue CAGR

2%* 10% 8%

34% 25% 21%

EBITDA margins 25% 18% 18%

* Adjusting for defense and shipbuilding

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Subsidiaries with value unlocking potential

Page 19: Larsen & Toubro - Enam

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Others1%

Product engineering

services17%

Energy & Petchem

17%

Manufacturing32%

Insurance23%

BFSI10%

L&T Infotech… The gen-next offshore playL&T Infotech: A marquee player

Present in high-growth segments of engineering services, embedded systems and ADM services Strong domain expertise in product engineering services, manufacturing and energy/ petrochem

A fast growing USD 1bn business (FY10) with strong operating levers

Engineering and embedded systems will lead the next offshore waveScalable: Expected employee base of 21,000+ in FY10E This compares favorably against Tech Mahindra’s Q1FY08 employee base of 21,000+

Margin increase to be greater than peersHigher operating levers as compared to peers. Currently has offshore revenue share of 43% and blended utilization rates of 63%Expect utilization to improve from current 63% to 73%+Increased offshoring - FY07 onsite: offshore mix was at 57:43Expected reduction of leverage from the present levels of 1:1. This will improve net realizations for investors

Net Profit: Sensitivity to growth and margins

Value/share: Sensitivity to exchange rate and P/E

Business Verticals: USD 300mn (FY07)

(USD mn)35 40 45 50 55

11 81 90 100 111 12213 95 106 118 131 14415 110 123 136 151 16617 125 139 154 171 18919 139 155 173 191 211

NP

M (

%)

Sales CAGR (%)

(Rs/ share)292 35 37 39 41 438 77 91 107 124 144 10 114 135 158 184 212 12 158 186 218 254 294 14 209 247 289 336 389 16 267 315 369 429 497

P/E

(x)

INR/USD

Source: Company, ENAM Research

Page 20: Larsen & Toubro - Enam

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L&T IDPL: The dark horse3 year old Infrastructure subsidiary - 78.4% held by L&T

Project status: Rs 87.5bn worth of infra projects (roads & bridges, ports and airports) with L&T’s equity commitment of Rs 11.6bn, are under implementationL&T IDPL in turn owns 75% of L&T Urban Infra (UIL). Real estate projects under its Urban Infra worth Rs 61bn with equity commitment of Rs 17.3bn

Key principles of L&T IDPLTo divest the projects wherein L&T does not have controlling stake i.e. < 51% stake in non-road projectAll road projects should have 100% stakeThreshold IRRs in case of non–revenue sharing infrastructure projects to be 16% and 20% for real estate

Plan for an IPO only when projects under implementation are equal to projects under operation (50:50) mix, which is likely after a minimum of two years

Cost Equity Stake (%)

L&T equity

IRR (%)

on BV of equity

EV (Rsbn)

Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8

Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7

Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230

Source: Company, ENAM Research

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Financial evaluation: RoI to expand over long term

0

100

200

300

400

500

FY06 FY07 FY08E FY09E FY10E

(Rs bn)

Construction Manufacturing InfotechFinance Others

Expect 27% CAGR in revenues over FY07-10EInfrastructure and hydrocarbon investments to drive 29% CAGR in construction revenues through FY07-10EManufacturing biz. i.e. Electrical, MIP and Heavy Engg. to sustain 28% CAGR over FY07-10EInfoTech and Finance subs to continue it growth trend

Margin to expand 60bps over FY07-10EFavorable shift in order book mix; low margin roads down to 10% in FY07 from 20% in FY06, while high margin airports have increased from 5% in FY06 to 15% in FY07Ability to improve margins by optimally allocating fungible talent and reduction in number of sites

Free cash flow generation beyond FY09Major capex required of USD 1.5bn over FY08-10 to achieve targeted growth of 30% 5-year CAGRFunding capex through excess cash on books and internal accruals

RoI expand over longer term driven by rising share of high margins new business and IT

Improving revenue mix

Source: Company, ENAM Research

FCF/ ROI trend

(22,000)

(11,000)

0

11,000

22,000

2006 2007 2008 2009 2010

(Rs mn)

18

20

22

24

26

28

30(%)

FCF (LHS) RoCE (RHS)

Page 22: Larsen & Toubro - Enam

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Construction

BODBOD

Non executive Directors

A M Naik, CMDA M Naik, CMD

Succession planning

ESOPs

Merit based compensation structure

Restructuring of mgmt. cadre

E & C Projects Heavy EngineeringElectricals & Electronics MIP IT & Technology

Services

K V RangaswamiK V Rangaswami K. VenkatramanK. Venkatraman M. V. KotwalM. V. Kotwal R. N. MukhijaR. N. Mukhija J. P. NayakJ. P. Nayak V.K. MagapuV.K. Magapu

Each SBU head currently grooming a team of 5 people~35 people are thus being groomed to be the next line of leaders; of these 5-7 new leaders will graduate to the board level as an CEO of each SBUs

Cascading the program to various levelsA company wide endeavor covering over 4,000 managers has been launched to hone abilities and translate skills into effective leadership and motivationSelect employees are also sent to premier business schools to gain experience and knowledge through Advanced Management Programs

Each SBU head currently grooming a team of 5 people~35 people are thus being groomed to be the next line of leaders; of these 5-7 new leaders will graduate to the board level as an CEO of each SBUs

Cascading the program to various levelsA company wide endeavor covering over 4,000 managers has been launched to hone abilities and translate skills into effective leadership and motivationSelect employees are also sent to premier business schools to gain experience and knowledge through Advanced Management Programs

Corporate governance

Strategic supervision

Leadership development

Financial Services,

Finance & HR

Y.M. DeostahleeY.M. Deostahlee

Retaining talent through…

Shortening the learning curve

‘Campus to corporate program’

‘Anytime learning program’

Attracting talent by …

7 Exec. Dir/ SBU Heads

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23

Key constraints/ risksExecution risk

Time and cost over-runs during project execution could impact our earnings assumptionsL&T was penalized Rs 1bn during FY05 for time over-run in a project in the Middle East

Talent retention and acquisitionRetaining existing talent and acquiring new talent with proper know-how is key to L&T’s ability to expand into verticals – ship building, nuclear, aerospace, defense, etc.

Interest rate riskSignificant increase in interest rates impacts corporate capex and infrastructure investments adversely

Commodity price volatilityL&T’s key raw material inputs comprise metals, cement, bitumen etc. - A sharp surge in raw material prices impacts margins adverselyHowever, most contracts have a built in price escalation clause

Delay in new forays/ unexpected hurdlesAerospace, defense and nuclear sectors have traditionally been GOI/ PSU dominated sectorsEntry into these sectors may be delayed in case of unexpected hurdles/ political impediments

Page 24: Larsen & Toubro - Enam

24

SOP Valuation

Cost Equity Stake (%)

L&T equity

IRR (%)

on BV of equity

EV (Rsbn)

Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8

Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7

Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230

Source: Company, ENAM Research

L&T IDPL (BOT Projects)

SOP -> Rs 2,923

-2,923 Value per Share (Rs)

-34 Less Debt FY10

based on ENAM TP of Rs946

12x FY10E EPS

12x FY10E EPS

3x P/BV

12.5x of FY10E EV/EBITDA

Comments

46

89

218

230

2,373

Value per share

Value of 11.5% stake of Ultratech Ltd

L&T Finance (Financing construction equipments)

L&T Infotech (Product engg., Energy/ Petchem, Mfg.)

IDPL ( BOT projects)

Core Business

Particulars

Page 25: Larsen & Toubro - Enam

25

DCF ValuationRs bn FY08E FY09E FY10E FY11E FY12E FY13E FY14E _ _ FY20E

Key Assumptions (%)

Cost of equity 13.0

Cost of debt (post tax) 5.6

WACC 9.3

Terminal growth rate of cash flow 0

Operating EBIT 34.5 44.3 55.9 74.2 84.7 93.1 108.5 239.4

plus: Taxes 9.8 12.6 14.0 18.6 21.2 23.3 27.1 59.9

NOPLAT 24.8 31.7 41.9 55.7 63.6 69.8 81.4 179.6

less: Depriciation 4.6 6.1 7.1 8.5 9.7 10.9 12.1 23.1

Gross Cash Flow 29.3 37.8 49.0 64.2 73.3 80.7 93.5 202.7

less: changes in operating WC 8.8 10.8 15.8 -3.5 16.6 15.4 16.1 34.5

Operating Cash Flow 20.5 26.9 33.2 67.7 56.7 65.3 77.4 168.2

less: Capex 20.0 20.0 15.0 21.7 19.7 18.8 21.5 40.7Free Cash Flow 0.5 6.9 18.2 46.0 37.1 46.5 56.0 127.5

Terminal value 1,371

PV FCF and terminal value 767

Net debt 22

Investments* 81

Equity value 870

Shares o/s (m) 292

Equity value per share (Rs) 2,981

CMP 2,432

Upside (%) 23

Source: Company, ENAM Research, * IDPL/Ultratech Cement

Page 26: Larsen & Toubro - Enam

26

Company FinancialsIncome statement Key ratios

Source: Company, ENAM Research

Y/E March 2007 2008E 2009E 20010E

Net sales 203,315 263,100 337,815 417,080Other operating income 3,494 4,193 5,031 6,037Total income 206,809 267,293 342,846 423,118

Cost of goods sold 160,016 207,373 266,736 328,352 Contribution (%) 23 23 23 23 Advt/Sales/Distrn O/H 17,319 20,826 25,773 31,761

Operating Profit 29,474 39,094 50,337 63,004 Other income 1,663 2,284 1,816 1,692

PBIDT 31,137 41,378 52,153 64,696 Depreciation 3,413 4,559 6,050 7,100 Interest 2,460 4,207 4,207 4,154 Other pretax 0 0 0 0Pre-tax profit 25,264 32,611 41,895 53,441 Tax provision 7,438 9,783 12,569 16,032 (-) Minority Interests 1,162 1,151 1,296 1,380 Associates 951 1,141 1,369 1,643Adjusted PAT 17,615 22,818 29,400 37,672E/o income / (Expense) 4,787 0 0 0

Reported PAT 22,401 22,818 29,400 37,672

Y/E March 2007 2008E 2009E 20010E

Sales growth 24.0 29.4 28.4 23.5

OPM 14.5 14.9 14.9 15.1 Oper. profit growth 35.5 32.6 28.8 25.2 COGS / Net sales 77.4 77.6 77.8 77.6 Overheads/Net sales 8.4 7.8 7.5 7.5 Depreciation / G. block 5.6 5.0 5.5 5.6 Effective interest rate 5.5 7.0 7.0 7.0

Net wkg.cap / Net sales 18.8 18.5 17.4 17.3 Net sales / Gr block (x) 3.9 3.5 3.4 3.5

Incremental RoCE 18.3 34.9 39.3 48.9 RoCE 25.8 25.4 27.6 29.6 Debt / equity (x) 0.8 0.6 0.5 0.4 Effective tax rate 29.4 30.0 30.0 30.0 RoE 28.1 26.9 27.5 27.8 Payout ratio (Div/NP) 18.8 21.1 19.3 18.8

EPS (Rs.) 60.3 78.2 100.7 129.0 EPS Growth 24.7 29.5 28.8 28.1 CEPS (Rs.) 74.2 96.7 125.2 158.1 DPS (Rs.) 14.9 17.0 20.0 25.0

(Rs mn) (%)

Page 27: Larsen & Toubro - Enam

27

Company FinancialsBalance sheet Cash flow

Source: Company, ENAM Research

Y/E March 2007 2008E 2009E 20010E

Total assets 140,619 159,772 184,803 215,274 Gross block 61,146 90,838 110,838 125,838 Net fixed assets 39,568 64,700 78,650 86,549 CWIP 14,692 5,000 5,000 5,000 Investments 0 0 0 0 Wkg. cap. (excl cash) 44,386 53,214 64,060 79,910 Cash / Bank balance 37,685 32,570 32,805 39,527 Others/Def tax assets 4,288 4,288 4,288 4,288

Capital employed 140,619 159,772 184,803 215,274 Equity capital 567 567 567 567 Reserves 74,656 93,809 118,840 150,811 Borrowings 60,100 60,100 60,100 58,600 Others 5,297 5,297 5,297 5,297

Y/E March 2007 2008E 2009E 20010E

Sources 57,072 23,713 31,081 37,571 Cash profit 21,045 27,387 35,377 44,509 (-) Dividends 4,216 4,815 5,665 7,081 Retained earnings 16,829 22,572 29,712 37,428 Issue of equity 5,886 0 0 0 Borrowings 30,469 0 0 (1,500) Others 3,888 1,141 1,369 1,643

Applications 57,072 23,713 31,081 37,571 Capital expenditure 28,231 20,000 20,000 15,000 Investments 0 0 0 0 Net current assets 12,312 8,828 10,846 15,850 Change in cash 16,529 (5,115) 235 6,721

(Rs mn) (Rs mn)

Page 28: Larsen & Toubro - Enam

28

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary natureEach recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in thisdocument (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed maynot be suitable for all investorsEnam Securities Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this documentThe Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approvalEnam securities Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the documentThis report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ENAM Securities Private Limited. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed thereinThis document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictionsNeither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Copyright in this document vests exclusively with ENAM Securities Private Limited.

CONFLICT OF INTEREST DISCLOSUREWe, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us.

Disclosure of interest statement (As of August 9, 2007)1. Analyst ownership of the stock Yes2. Firm ownership of the stock No3. Directors ownership of the stock No4. Investment Banking mandate No5. Broking relationship No

We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.


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