Larsen & Toubro Limited - Meeting with L&T IDPL CEO & MD - Antique

We attended an analyst meet organized by L&T, to interact with the top management of L&T IDPL, led by its CEO and MD, Mr. K. Venkatesh. The following are key highlights:

Bullish in the long-term

L&T IDPL's asset base has grown at a CAGR of 25% over FY05-12. The company now targets to post revenue CAGR of 40% over the next five years. The company will continue to participate in India's infrastructure boom, with focus on several sectors like transport, power, railways, metro, water, etc. L&T IDPL is the largest road developer in India, with 9088 lane kms of roads under operation / construction. It is building India's largest metro project in PPP format in Hyderabad.

Focus on project selection; targeting 18% IRR

L&T IPDL will continue to focus on only profitable projects and maintained target IRR of 18%. The management hinted that there is improvement in the competitive landscape, and companies with strong balance sheets will stand to benefit due to shortage of equity in the economy. The company has secured two projects - a state road project in Orissa (Single bidder in the INR 14.5bn project, LoA yet to come) and Kudgi power transmission project (beat PGCIL by 12% in INR13.5bn project). We believe this show renewed confidence in the business.

Management confident of meeting funding needs

L&T IDPL has currently projects worth INR 436.8bn under management. Equity commitment on these projects stands at INR 81.32bn, out of which INR 34.92bn has been infused already. The company has INR312bn of debt sanctioned, of which INR 133bn is disbursed. The company expects equity requirement of around INR 82bn over FY14-18, and expects to meet this by 1) INR 20bn through equity infusion by an investor, 2) INR 9 bn through sale of stake in Dhamra Port, 3) INR13bn from a strategic investor (26% stake) in Metro project, 4) INR 40 bn through portfolio churns, discounting future cashflows and debt at the IDPL level. The company seems to indicate that parent (L&T) will not be needed for funding needs, though it will continue to provide support as and when needed.

L&T IDPL is in growth phase, P&L not a good indicator

L&T IDPL is in growth mode with increasing portfolio of projects, which will incur losses in initial years (3-4 years) after commissioning, thereby depressing profitability of the company. For example, Dhamra port incurred loss of INR 4.6bn in FY12, and will be profitable at net level only in FY 15. Similarly, Hyderabad Metro will incur meaningful losses in FY17-18, as it starts commencing operations in various stages. However, we believe that over next 3-5 years, the company will have a stable portfolio of projects, which will start yielding results.

Cut earnings; maintain Buy

We believe that there is risk to execution in the next 6-12 months owing to external factors, which has prompted us to lower our FY14 and FY15 standalone L&T revenue estimates by 4.2% and 5%, respectively, resulting into consolidated EPS cut of 13.1% and 8.7% respectively. We continue to maintain a positive view on L&T and maintain buy with revised target price of INR1025, based on 14 x FY15 (earlier 16 x FY15) standalone earnings and INR277 for subsidiaries.

Source : Equity Bulls

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