LARSEN & TOUBRO :GREAT BUSINESS

Scrip Code: 500510 / LT

CMP:  Rs. 1556.10; Buy at Rs. 1450 - 1500
Short term Target: Rs. 1800
Market Cap: Rs. 94,764.5  cr.
52 Week High/Low: Rs. 2212.70 / Rs. 1410

Total Shares: 60,78,05,009 shares. Public holding – 21,41,87,305 – 35.24 %

Book Value: Rs.300.50; Face Value: Rs. 2.00; EPS: Rs. 61.04; Div: 625 %.

P/E: 25.50 times; Ind P/E: 16.56; EV/EBITDA: 14.44
Total Debt: Rs. 6,863.95 cr; Enterprise Value: Rs. 1,02,511.17 cr

 LARSEN & TOUBRO – L&T is India’s largest conglomerate. One of the largest company diversified into Power, Nuclear, Hydrocarbons, Cements, Critical Engineering’s, Procurement, Construction (EPC) businesses. It also operates & handles roads, railways metros, bridges, ports, airports infrastructure projects. Company is also into power Transmission & Distribution (T&D) , equipment manufacturing (switch gears), Finance & IT software.

  

I initiate my coverage on L&T with Buy, on the back of its robust core businesses, infrastructure opportunities and potential for value unlocking in its subsidiaries. Core business would drive earnings, as it has robust order book and good revenue visibility. Subsidiaries in IT Services, Financials and Infra would be valuation triggers. The infra-led growth would also be backed by growing portfolio and geographical reach via JVs/acquisitions. Good revenue visibility. L&T is geared to meet growth guidance of 20% in sales in FY11, given its robust order book of Rs. 1.1trn (3.1x FY10 standalone sales; up 26% yoy), orders (Rs. 494bn; up 8% yoy in 9MFY11), and pick up in execution. JVs/acquisitions to expand portfolio and market reach. Increased presence in key infra segments (thermal, nuclear power, oil & gas, ports), power equipment manufacturing and geographies would complement core competency in EPC. Value unlocking in subsidiaries. Revival in IT business and high growth in financial services and infra development would be

catalysts for valuations upside. L&T’s financial services arm is likely to get listed by FY12, followed by other subsidiaries.

Valuation -  

My long term target price is Rs. 2,040 –core business at Rs. 1,564 based on 22x FY12e EPS; subsidiaries and other businesses at Rs. 476. The only key risks are lagging in execution of orders and slow revival in industrial Capex and exports.

YE31 MARCH	FY09	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	40,511.1	43,969.8	53,082.8	64,773.2	79471.6
NET PROFIT (Rs. crs)	2,907.8	3,324.4	4,174.4	5081.9	6,399
EPS (Rs.)	47.9	54.8	68.8	83.7	105.4
PE (x)	34.8	30.4	24.2	19.9	15.8
PRICE/BOOK	6.7	4.6	4.0	3.4	2.9