Larsen & Toubro : Grab Great Business at Great Price !!!

Scrip Code: 500510 / LT

CMP:  Rs. 1131.80; Buy at current levels & on Dips.

Short term Target: Rs. 1155, 6 month Target – Rs. 1400; STOP LOSS – Rs. 1040;  Market Cap : Rs.  69,171.21 Cr; 52 Week High / Low: Rs. 2001.70 / Rs. 969.15

Total Shares: 61,11,61,097 shares; Promoters : 26,18,94,131 shares –42.85 %; Total Public holding : 34,92,66,966 shares – 57.15 %; Book Value: Rs. 351.07; Face Value: Rs. 2.00; EPS: Rs. 66.62; Div: 725.00 % ; P/E: 16.98 times; Ind. P/E: 12.81; EV/EBITDA: 10.55.

Total Debt: 7,161.11 Cr; Enterprise Value: Rs. 77,282.67 Cr.

LARSEN & TOUBRO LTD: LARSEN & TOUBRO LTD was founded in 1938. Larsen & Toubro Limited operates as a technology, engineering, construction, and manufacturing company worldwide. Larsen’s divisions include Engineering and Construction Projects (E&C), Heavy Engineering (HED), Engineering Construction and Contracts (ECC), Electrical and Electronics (EBG), Machinery and Industrial Products (MIPD), and Information Technology & Engineering Services. These divisions undertake engineering design and construction of infrastructure and industrial projects, including civil, mechanical, and electrical & instrumentation engineering. The customer profile includes names, such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, and Goodyear. The Heavy Engineering (HED) division manufactures and supplies custom designed and engineered critical equipment and systems to the needs of core-sector industries and the defense sector. It is the preferred supplier of equipment for a select range of products, globally. The Division has entered into Shipbuilding business and engages in construction of specialty commercial vessels and warships for the navy, as well as the coast guard.  The Engineering Construction and Contracts (ECC) division delivers engineering, procurement, and contract solutions in the oil and gas, petrochemicals, power, and water space industries. The Electrical and Electronics (EBG) division offers solutions in low & medium voltage categories. Its businesses consists of switchgear, switchboards for different applications, including marine, meters, automation systems, petroleum dispensing pumps, medical equipment and tooling solutions and has operations at different locations in India (two in Mumbai and one each in Ahmednagar, Mysore, Faridabad and Coimbatore) and one unit for manufacturing operations in China. The Information Technology and Engineering Services Information and Technology Services division offers e-Engineering solutions, including product design and engineering analysis, engineering process support, production and plant engineering, asset information management, and design automation to high end technology verticals, such as automotive, aerospace, marine and ship design, plant engineering, and industrial products. This division also provides embedded systems and solutions comprising supply of hardware, application software, and enclosure design for electronics product design and development in automotive, medical, semiconductor, and industrial products. On November 30, 2009, Nuclear Power Corporation Of India Limited and Larsen & Toubro Ltd. announced the formation of a joint venture company to produce special steels and ultra heavy forgings. On January 22, 2010, Larsen & Toubro Ltd. formed a joint venture with Sapuracrest Petroleum Bhd to undertake installation of pipelines and construction of offshore rigs and platforms in India, West Asia and South East Asia. L&T does business in Malaysia, the United States, the Unite Kingdom, Brazil, Saudi Arabia, the United Arab Emirates, Qatar, Bangladesh, and Sri Lanka. L& T LTD is compared globally with Ssangyong Engineering & Construction, Aker Solutions ASA and JTEKT Corporation.

Investment Rationale:

Larsen & Toubro’s (L&T) construction arm has bagged various orders aggregating to Rs. 1,000 cr in 3QFY2012. In the buildings and factories segment, the company has secured a Rs. 200 cr order from GMR Group for the construction of an air traffic control tower and associated works at Delhi International Airport. In the power Transmission & Distribution segment, the company has obtained new orders adding up to Rs. 334 cr from reputed clients for the construction of transmission lines and substations across India. An international order valued at Rs. 185 cr has been secured in Kuwait for the construction of a substation and associated overhead transmission line works. Orders valued at Rs. 282 cr were secured from Greater Mohali Area Development Authority for the construction of utility facilities such as water supply network, waste-water collection network, storm water network, road works, electrical works and other associated development works in Aerocity, Mohali. With these orders in hand, the company’s outstanding order book stands at whopping Rs. 1,50,553cr (3.4x FY2011 revenue), which provides good revenue visibility. This order booking takes the company’s total declared orders to Rs. 8,364 cr until now in this quarter against orders received worth Rs. 13,336cr in 3QFY2011. The drying up of order inflows is one of the major concerns for the stock and has led to underperformance in the recent past. L&T retained its revenue growth guidance at 2 5% for FY12E on the back of a robust order backlog and stable execution therefore giving optimistic assumption with higher probability of downward revision in ensuing quarters. However it sharply revised down guidance for EBITDA margins and order inflows; it is expected that EBITDA margins could decline by 0.75 % -1.25 %; there could be change in revenue mix and sharp increase in raw material prices. It is expected that growth in order flows could be muted by 5 % against 15 % – in view of 11 % yoy decline in H1FY12, This sector see no signs of revival in investment spends and continued postponements in order finalizations, but as said earlier that LARSEN & TOUBRO has an order book at whopping Rs. 1,50,553cr its is easily possible for L&T to bring its revenue on track as L&T is in better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities

Outlook and Valuation:

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 like IT Services, and Infra would be valuation triggers. The infra-led growth would also be backed by growing portfolio and geographical reach via JVs & acquisitions giving good revenue visibility. L&T has underperformed BSE Sensex and being in trading range from Rs. 970 – Rs. 1100, owing to factors such as slowing order inflows and rising competition (especially in the BTG equipment segment), leading to fears of slippage on order inflow guidance. Also, L&T lost the public sector shipyard, Mazagon dock, for defense and naval ships and failed to win the recent ONGC pipeline tenders. It is believed that though L&T would find it difficult to meet its revised guidance for FY2012 (growth of 5 % in order inflow and 25 % in revenue), but still it is better placed than its peers on a number of counts (such as diversification and balance sheet strength). L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as trained cash flow, high leverage and limited net worth and technological capabilities. On the valuation front, due to the recent correction in prices, the stock is trading at PE of 14.85x and 12.63 for FY2012E and FY2013E earnings respectively, adjusted for subsidiary value, which is lower than its historical PE of 15-20x gives an excellent opportunity to grab such a fantastic business at such a low price & Hence, any further price correction provides a good opportunity to accumulate. Larsen & Toubro to declare its Q3 results ended 31st Dec 2011 on 23rd Jan 2012.

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	43,698.90	52,099.10	61,061.50	67,581.40
NET PROFIT (Rs. Crs)	3,374.50	4,179.00	4,566.20	5,269.20
EPS (Rs.)	56.20	68.90	76.20	89.60
PE (x)	23.80	19.40	17.50	14.90
P/BV (x)	3.80	3.30	2.80	2.40
EV/EBITDA (x)	14.00	12.10	11.70	10.40
ROE (%)	19.30	18.20	17.30	17.60
ROCE (%)	15.60	14.30	12.90	13.10

I would buy LARSEN & TOUBRO LTD with a price target of Rs. 1400 for Medium to Long term and Rs. 1155 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 1040 on every purchase.


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