Larsen & Toubro - Reiterating Confidence... - ICICIdirect

We met with the management of L&T. Despite absence of any order announcements during the current quarter, the management reiterated confidence of achieving its 15-20% order inflow target for the year. The prospects for the full year remain robust, with bidding pipeline in varied stages of tendering.

Key takeaways:

Urban Infra, Hydrocarbons and Power T&D to be key drivers for Inflows

Urban Infra orders for Commercial and residential real estate, hospitals, luxury hotels and Education sector are expected offers strong pipeline. The minimum ticket sizes of these orders are Rs200 crore, while the average size being 300-400 crore. As per the management, this segment can alone contribute to ~25% of the order inflows for FY13E. Coupled with this, T&D segment (domestic and international orders) have the potential to offer Rs10000-15000 crore inflow opportunity in FY13E.

Various international airports that are likely to be bidded out this year which include opportunity in Kuwait, Nepal, Bahrain and Oman, while on the domestic front, Chandigarh and Bangalore airport expansion can provide EPC opportunities.

In Middle East, the company has successfully established a good base in terms meeting pre qualification criteria, strategic JV's with local players to meet the IKEC norms, hiring local talent and a proven track record. The company expects good inflows from the both the domestic and international Hydrocarbon space. Further, it is positive winning a considerable pie of Rs31,000 crore capex program from ONGC this year.

Defocus on BOT projects to improve RoE's, key investor positive

A key positive development has been addressing investor concern with respect to investments in capital guzzling BOT projects. The management has decided to defocus on BOT projects rather monetise assets under development via IPO/stake sale to P/E firms in individual subsidiaries/SPVs to maximize shareholder value. As of Q1FY13, investments and loans to subsidiaries account for 20%/54%/38% of parent's balance sheet, net worth & capital employed, respectively. This makes us believe RoE's will trough at current levels and will only inch up.

On JV with Mazagaon Dock:

Though the exact quantum of orders to flow to the JV remains undecided, anything in the range of $4 bn to $8bn might be on the cards. On the timeline front, things should start taking a concrete shape by the current year end. These high margins orders would be having an execution period of 4-5 years.

On Nabha Power:

The construction activity is progressing well, even though the LOA's with Coal India has not been converted into FSA's. The project is expected to commence operations in FY14E. The expansion phase of 700 MW is still on Hold owing to Fuel Linkage Issues

On Bidding for Road BOT Projects:

They have reached the internally set limit for capital allocation to road BOT projects and would be refraining from bidding for road BOT projects until they raise additional equity from IDPL itself. As of now, the focus will be on the cash contracts.

United on earnings, divided on multiples

There is a consensus on the quantum of YoY PAT growth for L&T in FY13E (10%). We believe the Street is divided on ascribing a P/E multiple to the base business (range of 10-16x on one year forward multiple). We remain relatively upbeat and are on the upper range of the consensus band given L&T poses best earnings visibility (16% revenue CAGR over FY12-14E), solid balance sheet and intention to increase base RoE's via monetization of key subsidiaries. Maintain BUY with fair value of Rs.1523.

Source : Equity Bulls

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