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Larsen & Toubro - Enam

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India ResearchStock Data No. of shares Market cap 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code : 284mn : Rs 691bn : Rs 2735/ Rs 1136 : 1mn shares : LT IN : LART.BO

Larsen & ToubroRelative to Sector:

Shareholding (%) Jun-07 QoQ chg Promoters FIIs MFs / UTI Banks / FIs Others : : : : : 0.0 17.8 15.8 22.4 43.9 0.0 (0.4) 0.8 0.2 (0.5)

Rs 2,432Target Price: Rs 2,923Potential Upside: 20%

Outperformer

Relative Performance300 200 100 0 Jun-06 Dec-06 SensexSource: ENAM Research, Bloomberg

From cyclical to secular growthJun-07 L&T

Financial summaryY/E March 2007 2008E 2009E 20010E Sales (Rs mn) 206,809 267,293 342,846 423,118 PAT (Rs mn) 17,615 22,818 29,400 37,672 Consensus EPS* (Rs.) 78.1 102.1 134.8 EPS (Rs.) 60.3 78.2 100.7 129.0 Change (YoY %) 25 30 29 28 P/E (x) 26.8 31.1 24.2 18.8 RoE (%) 28.1 26.9 27.5 27.8 RoCE (%) 25.8 25.4 27.6 29.6 EV/EBITDA (x) 16.5 18.5 14.4 11.4 DPS (Rs) 14.9 17.0 20.0 25.0

Source: *Consensus broker estimates, Company, ENAM estimates

Bhavin Vithlani

Shreya Doshi

[email protected] (+91 22 6754 7634)

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

Associate: Akshen Thakkar

August 11, 2007 1

Table of contentsSlide No. Investment Summary Building a robust business model New business initiatives are key long term earnings drivers Existing businesses have a strong foothold Subsidiaries with value unlocking potential Key Risk/Concerns Valuation Company Financials 3 5 6 13 18 23 24 26

2

Investment summaryVisibility enhanced beyond FY10L&Ts initiatives in high RoI defense, power plant equipments, nuclear, shipbuilding and railway businesses are key earnings drivers beyond FY10ROI New businesses (ROI 30%) IT (ROI 30%) Manufacturing (ROI-25%) E&C (ROI 18%) 2007 2010E 5% 2012E 15% 3%

Existing businesses have a strong footholdOrder flows in infrastructure business to accelerate Outlay of USD 350bn over 2007-2012E i.e. 24% CAGR Industrial capex of USD 200bn over FY07-12 i.e. 25% CAGR, mostly greenfield Petro dollars driving GCCs USD 1.4trn capex

8%

10%

11%

24%

23%

20%

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

66%

62%

54%

New businesses to cover E&C cyclicalityL&Ts Business trajectory

RoI to expand over the long termGrowth

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

E&C Business Cycle

IT, defense and power secular businesses

2007

Source: Company, ENAM Research

Time

2012

3

SOP ValuationSOP -> Rs2,923Particulars Core Business IDPL ( BOT projects) L&T Infotech (Product engg., Energy/ Petchem, Mfg.) L&T Finance (Financing construction equipments) Value of 11.5% stake of Ultratech Ltd Less Debt FY10 Value per Share (Rs) Value per share 2,373 230 218 89 46 34 2,923 Comments 12.5x of FY10E EV/EBITDA 3x P/BV 12x FY10E EPS 12x FY10E EPS based on ENAM TP of Rs 946 -

L&T IDPL (BOT Projects)Cost Roads Ports Kakinada Seaports Ltd ISPL Haldia Ltd Dhamra Port Company Ltd Bangalore International Airport Ltd UIL Other Real Estate - UIL Total L&T's Stake @ 78.4% Value per share of L&TSource: Company, ENAM Research

Equity 7.7 6.0 0.8 0.3 4.9 6.4 12.5 6.4 -

38.3 29.9 4.0 1.3 24.6 19.3 25.0 12.8 -

Stake (%) 100% 39% 22% 50% 17% 100% 75% -

L&T equity 7.67 2.83 0.31 0.06 2.46 1.1 12.5 4.8 28.9 -

IRR (%) 18% 25% 25% 25% 40% 25% 25% -

on BV of equity 2.3 3.1 3.1 3.1 5.0 3.1 3.1 -

EV (Rsbn) 17.3 8.8 1.0 0.2 7.7 5.5 39.1 14.9 85.6 67.1 230

4

Building a robust business model2007 2010 2012 ROI FY07-12E CAGR (%)73% 36% 20%

Sales 2012E ( Rs bn)94 72 124

5 New biz. * IT/ Fin Mfg.

3% 3% 8% 8% 24% 24% 66% 66%

5% 5% 10% 10% 23% 23% 62% 62%

15% 15% 11% 11% 20% 20% 54% 54%

30% 30% 25%

E&C Total

18%

20%

340

25%

631

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

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&Ts 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 businessesLeveraging 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

We expect L&T to clock USD 16bn in revenues by 20125

New business initiatives Key long term earnings drivers

6

New businesses: Opportunity snapshotLarsen & Toubro Foray into five new potential billion dollar businessesThermal power equipments20GW of supercritical projects to be awarded over the next five years

Defense

Shipbuilding

Nuclear power

Railways

DOFA estimates Indias defense market to reach USD 30bn by 2012 from USD 10bn in 2007

World shipbuilding order book has been growing at 29% over 2003-06. Current global market estimated at USD 20bn (Rs bn) Revenue EBITDA 2007 2012E NA 25 NA 6.2

Expect 40GW of Nuclear projects to be awarded by 2007-2012

Indian Railways to spend USD 68bn for modernization, expansion, freight corridor, etc.

(Rs bn) Revenue EBITDA

2007 6 1.5

2012E 42 8.4

(Rs bn) Revenue EBITDA

2007 NA NA

2012E 27 4.0

(Rs bn) Revenue EBITDA

2007 NA NA

2012E NA NA

(Rs bn) Revenue EBITDA

2007 2012E NA NA NA NA

Key drivers for 2010-2012Ship building 27% Existing 85% New 15%

Drivers beyond 2012Defense 44%

Source: Company, ENAM Research

Power 29%

7

45%

DefenseIndustry size 2007 ( Rs bn)45

Industry growth (FY07-12E)34%

L&T FY08E Sales (Rs bn)8.1

L&T market share by 20123%

L&T growth YoY47%

Estimated ROI40%

Scope of workManufacturing missile guiding systems, rocket launchers, etc. Weapon System & Sensors Radar Platforms, Sonar Systems & Electronic Warfare Systems Developing products with DRDO

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

Defense: Sales and EBITDA trends50 40 30 20 10 0 FY07 Sales FY10E FY12E EBITDA (Rs mn)

L&Ts strategy is to specifically target the imported equipments

Currently ~50% of the USD 10bn defense capital procurements are imported Acquired Spectrum, a defense R&D company with capabilities in strategic electronics and Aerospace Awaiting 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

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

8

29%

Power plant equipmentIndustry size 2007 ( Rs bn)230

Industry growth (FY07-12E)15%

L&T FY08E sales (Rs bn)NA

L&T market share by 201220%

L&T growth YoYNA

Estimated ROI30%

Scope of workCaptive & Cogen power plants Renovation and modernization (R&M) Operation and maintenance (O&M) Balance of plant and EPC Foraying into manufacturing boilers & turbinesSource: Company, ENAM Research

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

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

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 plant L&Ts current scope involves 55% of project cost ie balance of plant related EPC

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

9

27%

ShipbuildingGlobal industry size 2007 ( Rs bn)1600

Industry growth (FY07-12E)30%

L&T FY08E Sales (Rs bn)2

L&T market share by 2012< 1%

L&T growth YoY88%

Estimated ROI25%

Scope of workLNG carriers and VLCC Submarines and Frigates for Indian Navy Offshore process platforms

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

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

Source: Company, ENAM Research

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 14-16bn Larger frigates and submarines are currently being imported ; L&T is targeting this area JV with Sapura Crest, Malaysia for sub-sea pipe laying and installation of platforms 10

Offshore platforms

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

Nuclear power projectsIndustry order inflows 2007 (MW)500

Industry order inflows FY07-12E (MW)12,800*

L&T FY08E Sales (Rs bn)NA

L&T market share by 201210%

L&T growth YoYNA

Estimated ROI30%

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

DriversINDO-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.

Business economicsParticulars Capex for fixed assets Peak revenues EBIT @ sustainable margin of 15% PAT @ sustainable PATM of 9% Wkg cap requirement @ 20% of sales Assumed asset turns Sustainable ROI Sustainable ROE at D:E of 0.5:1 (Rs mn) 10,000 40,000 6,000 3,600 8,000 4.0 33 40

Source: 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 8GW L&Ts 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.

L&T is the only Indian player with the technology for a nuclear reactor11

RailwaysL&Ts target scope of work Railway electrification Track laying and bridge construction Traffic facilities Rolling stock Signaling and telecom works Metro rails Opportunity for private players Development of dedicated freight corridors Upgradation of signaling and telecommunications systems Augmentation of capacity for Rolling Stock manufacturing Metro rail for cities like Mumbai, Bangalore and Hyderabad.300 250 200 150 100 50 FY04Source: Company, ENAM Research

Railway: Plan outlay(Rs bn) 190 136 110 141 300

FY05

FY06

FY07R

FY08E

Source: Budget Documents

Indian Railways has staged a dramatic turnaround in recent years and is expected to post a revenues surplus of Rs 200bn in FY07Indian Railways (IR) has seen a turnaround in its performance in the last three years IR 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 CorridorsL&T is targeting the BOOT opportunity in freight corridor and port connectivity projects

Opportunity in Railways could be as large as roads12

Existing businesses have a strong foothold

13

Driven by a surge in domestic capexInvestor ClassRs bn Industrial Capex Steel Aluminum Cement Paper Fertilisers Textiles Petrochemicals Oil & gas Automobiles Rs bn

Capex and Growth TrendsFY03-FY07 1,584 141 20 60 56 40 26 20 1,040 181 FY03-FY07 3,511 1,225 41 797 337 1,111 FY03-FY07 2,765 1,798 967 FY08-FY12E 4,914 1,000 205 400 148 93 60 200 2,498 310 FY08-FY12E 10,500 3,687 408 2,714 870 2,821 FY08-FY12E 9,637 5,367 4,270 CAGR (%) 25% 48% 59% 46% 21% 18% 18% 58% 19% 11% CAGR (%) 24% 25% 58% 28% 24% 20% CAGR (%) 28% 24% 35%

Drivers

Dampeners

Private Sector Dominated

High commodity prices High utilization levels Available natural resources

Economic Slowdown Rising interest rates Increasing lead time for equipments

Public Private Partnership

Infrastructure Roads Airports Railways Ports Real Estate Rs bn Power Power Generation Power T & D

Movement of goods Urbanization/ Globalization

Rising interest rates Traffic growth

Public Sector Dominated

Power shortage

Collection risk

Source: Crisinfac, ENAM Research

Estimated CAGR of 25% in domestic investments over FY08-12E14

further aided by the boom in GCC & ChinaRobust outlook for GCC nationsNational income avg. 19% growth in 2002-06 GCC governments added almost USD 500bn to net foreign assets over 2002-06

Key International OperationsL&T International FZE

USD 1.25 trillion in planned public and private projects over 2007-12EUSD 330bn in oil & gas and power sectors L&Ts forte

Middle East

China

L&T has expanded capacities in anticipation of growthModular fabrication facility in Oman for servicing offshore, refining, petchem and chemical sectors Electrical switchgear & switchboard facility in China for servicing demand from the housing segment

Hydrocarbons & Infrastructure Saudi Arabia, Oman, UAE, Qatar, Kuwait

Coal Gasification Electrical std products Sourcing & Global Manufacturing

Petro dollars are fuelling infra spend in GCC800 600 400 200 0 Construction Petchem Industry Oil&Gas Water&Waste Power (USD bn)

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

Underway

Advanced planning stage

Early planning stage

Source: Company, NBK Economic Research, ENAM Research

15

Changing sector dynamics to favor L&TInfrastructure Infrastructure Hydrocarbons Hydrocarbons Industrial Industrial

Changing sector dynamics

Avg. order size for ~4.5K kms of BOT roads to increase to ~300kms from ~100kms earlier Privatization of Ports and Airports 30GW of 12th plan Hydro projects to be ordered in 11th plan

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

India Inc on greenfield addition spree: Steel: 25 MMTPA over 2007-12 Aluminum: 1 MMTPA over 200712 Cement: 100MMTPA over 200712

.to benefit L&T

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

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

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

Est. revenues by 2010

Rs 152bn

Rs 142bn

Rs 69bn

Share of revenues by 2010

36%

34%

17%

Corporate capex is adequate to meet demand growth16

Manufacturing: Key profitability contributorHeavy Engineering Heavy Engineering Electricals & Electricals & Electronics ElectronicsInfrastructure & real estate boom in India & Middle East Domestic power programs like rural electrification etc Upsurge in corporate capex NHDP program fueling growth for petrol dispensing stations

Machinery & Machinery & Industrial Products Industrial ProductsDomestic construction boom Up-tick in mining activities Large capex in user industries like cement, coal, iron ore, wind energy, paper

Sector opportunity

Refinery and fertilizer plant modernization in India Shipbuilding and nuclear reactors Refineries, petrochemical & fertilizer plants in Middle East Coal gasification projects in China, South America & Middle East Capacity augmentation at Mumbai & Coimbatore plants Focusing on high margin complex Aviation, Aerospace & Defense sectors. Export thrust

L&Ts initiatives

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

Adding distributorship with Komatsu mining eqip., Scania Multiaxle trucks JV in China for valves manufacturing Augmenting production/ servicing capacity

Est. revenues by 2010

Rs 29bn

Rs 40bn

Rs 35bn

Share of revenues by 2010 FY07-10 revenue CAGR EBITDA margins* Adjusting for defense and shipbuilding

2%* 34% 25%

10% 25% 18%

8% 21% 18%

17

Subsidiaries with value unlocking potential

18

L&T Infotech The gen-next offshore playL&T Infotech: A marquee playerPresent in high-growth segments of engineering services, embedded systems and ADM services Strong domain expertise in product engineering services, manufacturing and energy/ petrochem Business Verticals: USD 300mn (FY07)Product engineering services 17% Others 1% Manufacturing 32%

A fast growing USD 1bn business (FY10) with strong operating leversEngineering and embedded systems will lead the next offshore wave Scalable: Expected employee base of 21,000+ in FY10E This compares favorably against Tech Mahindras Q1FY08 employee base of 21,000+

BFSI 10% Insurance 23% (USD mn) 11 13 15 17 19 35 81 95 110 125 139 NPM (%)

Energy & Petchem 17%

Net Profit: Sensitivity to growth and marginsSales CAGR (%) 40 45 90 100 106 118 123 136 139 154 155 173 50 111 131 151 171 191 55 122 144 166 189 211

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 57:43 Expected reduction of leverage from the present levels of 1:1. This will improve net realizations for investors

Value/share: Sensitivity to exchange rate and P/E(Rs/ share) 292 8 10 12 14 16 P/E (x) 35 77 114 158 209 267 37 91 135 186 247 315 INR/USD 39 107 158 218 289 369 41 124 184 254 336 429 43 144 212 294 389 497

Source: Company, ENAM Research

19

L&T IDPL: The dark horse3 year old Infrastructure subsidiary - 78.4% held by L&TProject status: Rs 87.5bn worth of infra projects (roads & bridges, ports and airports) with L&Ts equity commitment of Rs 11.6bn, are under implementation L&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 project All road projects should have 100% stake Threshold IRRs in case of nonrevenue 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 yearsCost Roads Ports Kakinada Seaports Ltd ISPL Haldia Ltd Dhamra Port Company Ltd Bangalore International Airport Ltd UIL Other Real Estate - UIL Total L&T's Stake @ 78.4% Value per share of L&TSource: Company, ENAM Research

Equity 7.7 6.0 0.8 0.3 4.9 6.4 12.5 6.4 -

38.3 29.9 4.0 1.3 24.6 19.3 25.0 12.8 -

Stake (%) 100% 39% 22% 50% 17% 100% 75% -

L&T equity 7.67 2.83 0.31 0.06 2.46 1.1 12.5 4.8 28.9 -

IRR (%) 18% 25% 25% 25% 40% 25% 25% -

on BV of equity 2.3 3.1 3.1 3.1 5.0 3.1 3.1 -

EV (Rsbn) 17.3 8.8 1.0 0.2 7.7 5.5 39.1 14.9 85.6 67.1 230

20

Financial evaluation: RoI to expand over long termExpect 27% CAGR in revenues over FY07-10EInfrastructure and hydrocarbon investments to drive 29% CAGR in construction revenues through FY07-10E Manufacturing biz. i.e. Electrical, MIP and Heavy Engg. to sustain 28% CAGR over FY07-10E InfoTech and Finance subs to continue it growth trend500 400 300 200 100 0 FY06 Construction Finance22,000 11,000 0 (11,000) (22,000) 2006 2007 2008 2009 2010 FCF (LHS)Source: Company, ENAM Research

Improving revenue mix(Rs bn)

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 FY07 Ability to improve margins by optimally allocating fungible talent and reduction in number of sites

FY07 FY08E FY09E FY10E Manufacturing Infotech Others

FCF/ ROI trend(Rs mn) (%) 30 28 26 24 22 20 18 RoCE (RHS)

Free cash flow generation beyond FY09Major capex required of USD 1.5bn over FY08-10 to achieve targeted growth of 30% 5-year CAGR Funding 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

21

Succession planningCorporate governance Strategic supervisionNon executive Directors

A M Naik, CMD A M Naik, CMD

Retaining talent through

BOD BOD

ESOPs7 Exec. Dir/ SBU Heads

Construction

E & C Projects

Heavy Engineering

Electricals & Electronics R. N. Mukhija R. N. Mukhija

MIP

IT & Technology Services V.K. Magapu V.K. Magapu

Financial Services, Finance & HR Y.M. Deostahlee Y.M. Deostahlee

Merit based compensation structure Restructuring of mgmt. cadreAttracting talent by Shortening the learning curve Campus to corporate program Anytime learning program

K V Rangaswami K V Rangaswami

K. Venkatraman K. Venkatraman

M. V. Kotwal M. V. Kotwal

J. P. Nayak J. P. Nayak

Leadership development

Each SBU head currently grooming a team of 5 people 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 ~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 leaders will graduate to the board level as an CEO of each SBUs A company wide endeavor covering over 4,000 managers has been launched to hone A company wide endeavor covering over 4,000 managers has been launched to hone abilities and translate skills into effective leadership and motivation abilities and translate skills into effective leadership and motivation Select employees are also sent to premier business schools to gain experience and Select employees are also sent to premier business schools to gain experience and knowledge through Advanced Management Programs knowledge through Advanced Management Programs

Cascading the program to various levels Cascading the program to various levels

22

Key constraints/ risksExecution riskTime and cost over-runs during project execution could impact our earnings assumptions L&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&Ts 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&Ts key raw material inputs comprise metals, cement, bitumen etc. - A sharp surge in raw material prices impacts margins adversely However, 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 sectors Entry into these sectors may be delayed in case of unexpected hurdles/ political impediments

23

SOP ValuationSOP -> Rs 2,923Particulars Core Business IDPL ( BOT projects) L&T Infotech (Product engg., Energy/ Petchem, Mfg.) L&T Finance (Financing construction equipments) Value of 11.5% stake of Ultratech Ltd Less Debt FY10 Value per Share (Rs) Value per share 2,373 230 218 89 46 34 2,923 Comments 12.5x of FY10E EV/EBITDA 3x P/BV 12x FY10E EPS 12x FY10E EPS based on ENAM TP of Rs946 -

L&T IDPL (BOT Projects)Cost Roads Ports Kakinada Seaports Ltd ISPL Haldia Ltd Dhamra Port Company Ltd Bangalore International Airport Ltd UIL Other Real Estate - UIL Total L&T's Stake @ 78.4% Value per share of L&TSource: Company, ENAM Research

Equity 7.7 6.0 0.8 0.3 4.9 6.4 12.5 6.4 -

38.3 29.9 4.0 1.3 24.6 19.3 25.0 12.8 -

Stake (%) 100% 39% 22% 50% 17% 100% 75% -

L&T equity 7.67 2.83 0.31 0.06 2.46 1.1 12.5 4.8 28.9 -

IRR (%) 18% 25% 25% 25% 40% 25% 25% -

on BV of equity 2.3 3.1 3.1 3.1 5.0 3.1 3.1 -

EV (Rsbn) 17.3 8.8 1.0 0.2 7.7 5.5 39.1 14.9 85.6 67.1 230

24

DCF ValuationRs bn Key Assumptions (%) Cost of equity Cost of debt (post tax) WACC Terminal growth rate of cash flow Operating EBIT plus: Taxes NOPLAT less: Depriciation Gross Cash Flow less: changes in operating WC Operating Cash Flow 13.0 5.6 9.3 0 34.5 9.8 24.8 4.6 29.3 8.8 20.5 44.3 12.6 31.7 6.1 37.8 10.8 26.9 55.9 14.0 41.9 7.1 49.0 15.8 33.2 74.2 18.6 55.7 8.5 64.2 -3.5 67.7 84.7 21.2 63.6 9.7 73.3 16.6 56.7 93.1 23.3 69.8 10.9 80.7 15.4 65.3 108.5 27.1 81.4 12.1 93.5 16.1 77.4 239.4 59.9 179.6 23.1 202.7 34.5 168.2 FY08E FY09E FY10E FY11E FY12E FY13E FY14E _ _ FY20E

less: CapexFree Cash Flow Terminal value PV FCF and terminal value Net debt Investments* Equity value Shares o/s (m) Equity value per share (Rs) CMP Upside (%)

20.00.5

20.06.9

15.018.2

21.746.0

19.737.1

18.846.5

21.556.0

40.7127.5 1,371

767 22 81 870 292 2,981 2,432 23

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

25

Company FinancialsIncome statementY/E March Net sales Other operating income Total income Cost of goods sold Contribution (%) Advt/Sales/Distrn O/H Operating Profit Other income PBIDT Depreciation Interest Other pretax Pre-tax profit Tax provision (-) Minority Interests Associates Adjusted PAT E/o income / (Expense) Reported PAT 2007 203,315 3,494 206,809 160,016 2008E 263,100 4,193 267,293 207,373

(Rs mn)2009E 337,815 5,031 342,846 266,736 20010E 417,080 6,037 423,118 328,352

Key ratiosY/E March Sales growth OPM Oper. profit growth COGS / Net sales Overheads/Net sales Depreciation / G. block Effective interest rate Net wkg.cap / Net sales Net sales / Gr block (x) Incremental RoCE RoCE Debt / equity (x) Effective tax rate RoE Payout ratio (Div/NP) EPS (Rs.) EPS Growth CEPS (Rs.) DPS (Rs.) 2007 24.0 14.5 35.5 77.4 8.4 5.6 5.5 18.8 3.9 18.3 25.8 0.8 29.4 28.1 18.8 60.3 24.7 74.2 14.9 2008E 29.4 14.9 32.6 77.6 7.8 5.0 7.0 18.5 3.5 34.9 25.4 0.6 30.0 26.9 21.1 78.2 29.5 96.7 17.0 2009E 28.4 14.9 28.8 77.8 7.5 5.5 7.0 17.4 3.4 39.3 27.6 0.5 30.0 27.5 19.3 100.7 28.8 125.2 20.0

(%)20010E 23.5 15.1 25.2 77.6 7.5 5.6 7.0 17.3 3.5 48.9 29.6 0.4 30.0 27.8 18.8 129.0 28.1 158.1 25.0

2317,319 29,474 1,663 31,137 3,413 2,460 0 25,264 7,438 1,162 951 17,615 4,787 22,401

2320,826 39,094 2,284 41,378 4,559 4,207 0 32,611 9,783 1,151 1,141 22,818 0 22,818

2325,773 50,337 1,816 52,153 6,050 4,207 0 41,895 12,569 1,296 1,369 29,400 0 29,400

2331,761 63,004 1,692 64,696 7,100 4,154 0 53,441 16,032 1,380 1,643 37,672 0 37,672

Source: Company, ENAM Research

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Company FinancialsBalance sheetY/E March Total assets Gross block Net fixed assets CWIP Investments Wkg. cap. (excl cash) Cash / Bank balance Others/Def tax assets Capital employed Equity capital Reserves Borrowings Others 2007 140,619 61,146 39,568 14,692 0 44,386 37,685 4,288 140,619 567 74,656 60,100 5,297 2008E 159,772 90,838 64,700 5,000 0 53,214 32,570 4,288 159,772 567 93,809 60,100 5,297

(Rs mn)2009E 184,803 110,838 78,650 5,000 0 64,060 32,805 4,288 184,803 567 118,840 60,100 5,297 20010E 215,274 125,838 86,549 5,000 0 79,910 39,527 4,288 215,274 567 150,811 58,600 5,297

Cash flowY/E March Sources Cash profit (-) Dividends Retained earnings Issue of equity Borrowings Others Applications Capital expenditure Investments Net current assets Change in cash 2007 57,072 21,045 4,216 16,829 5,886 30,469 3,888 57,072 28,231 0 12,312 16,529 2008E 23,713 27,387 4,815 22,572 0 0 1,141 23,713 20,000 0 8,828 (5,115)

(Rs mn)2009E 31,081 35,377 5,665 29,712 0 0 1,369 31,081 20,000 0 10,846 235 20010E 37,571 44,509 7,081 37,428 0 (1,500) 1,643 37,571 15,000 0 15,850 6,721

Source: Company, ENAM Research

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CONFLICT OF INTEREST DISCLOSURE We, 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 2. Firm ownership of the stock 3. Directors ownership of the stock 4. Investment Banking mandate 5. Broking relationship Yes No No No No

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

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 nature Each 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 this document (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 may not be suitable for all investors Enam 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 document The 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 approval Enam 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 document This 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 therein This 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 restrictions Neither 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.

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