larsen & toubro - enam
TRANSCRIPT
1
From cyclical to secular growth
Financial summary
Source: *Consensus broker estimates, Company, ENAM estimates
Source: ENAM Research, Bloomberg
Relative Performance
Shareholding (%) Jun-07 QoQ chg
Promoters : 0.0 0.0 FIIs : 17.8 (0.4)MFs / UTI : 15.8 0.8 Banks / FIs : 22.4 0.2 Others : 43.9 (0.5)
Stock DataNo. of shares : 284mnMarket cap :Rs 691bn52 week high/low :Rs 2735/ Rs 1136Avg. daily vol. (6mth) : 1mn sharesBloomberg code : LT INReuters code : LART.BO
Relative to Sector: Outperformer
Larsen & Toubro
India Research
Rs 2,432Target Price: Rs 2,923
Potential Upside: 20%
August 11, 2007
0
100
200
300
Jun-06 Dec-06 Jun-07
Sensex L&T
Y/E MarchSales
(Rs mn)PAT
(Rs mn)Consensus EPS* (Rs.)
EPS (Rs.)
Change (YoY %)
P/E (x)
RoE (%)
RoCE (%)
EV/EBITDA (x)
DPS (Rs)
2007 206,809 17,615 - 60.3 25 26.8 28.1 25.8 16.5 14.92008E 267,293 22,818 78.1 78.2 30 31.1 26.9 25.4 18.5 17.02009E 342,846 29,400 102.1 100.7 29 24.2 27.5 27.6 14.4 20.020010E 423,118 37,672 134.8 129.0 28 18.8 27.8 29.6 11.4 25.0
Bhavin [email protected] (+91 22 6754 7634)
Associate: Akshen [email protected]
Shreya [email protected] (+91 22 6754 7646)
2
Table of contents
Slide No.
Investment Summary 3
Building a robust business model 5
New business initiatives are key long term earnings drivers 6
Existing businesses have a strong foothold 13
Subsidiaries with value unlocking potential 18
Key Risk/Concerns 23
Valuation 24
Company Financials 26
3
Investment summaryVisibility enhanced beyond FY10
L&T’s initiatives in high RoI defense, power plant equipments, nuclear, shipbuilding and railway businesses are key earnings drivers beyond FY10
Existing businesses have a strong foothold Order flows in infrastructure business to accelerate–Outlay of USD 350bn over 2007-2012E i.e. 24% CAGRIndustrial capex of USD 200bn over FY07-12 i.e. 25% CAGR, mostly greenfieldPetro dollars driving GCC’s USD 1.4trn capex
Margins to improve by 110bps over FY07-10EImproving quality of order backlog Ability to optimally allocate key resources Favorable business environment
RoI to expand over the long term 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
New businesses (ROI –30%)
IT(ROI – 30%)
Manufacturing(ROI-25%)
E & C (ROI – 18%)
2010E2007 2012E
3%
66%
24%
8%
ROI
11%
54%
20%
15%
10%
23%
5%
62%
E&C Business Cycle
New businesses to cover E&C cyclicality
L&T’s Business trajectory
IT, defense and power – secular businesses
Time
Gro
wth
2007 2012
Source: Company, ENAM Research
4
SOP Valuation
-2,923 Value per Share (Rs)
-34 Less Debt FY10
based on ENAM TP of Rs 946
12x FY10E EPS
12x FY10E EPS
3x P/BV
12.5x of FY10E EV/EBITDA
Comments
46
89
218
230
2,373
Value per share
Value of 11.5% stake of Ultratech Ltd
L&T Finance (Financing construction equipments)
L&T Infotech (Product engg., Energy/ Petchem, Mfg.)
IDPL ( BOT projects)
Core Business
Particulars
Cost Equity Stake (%)
L&T equity
IRR (%)
on BV of equity
EV (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8
Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7
Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230Source: Company, ENAM Research
L&T IDPL (BOT Projects)
SOP -> Rs2,923
5
Building a robust business model
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&T’s 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 businesses
Leveraging 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
30%
30%
25%
18%
3%3%
20102007 2012
66%66%
24%24%
8%8% 10%10%
23%23%
5%5%
11%11%
54%54%
20%20%
15%15%
62%62%
73%
36%
20%
20%
FY07-12E CAGR (%)ROI Sales 2012E
( Rs bn)
94
72
124
340
5 New biz. *
IT/ Fin
Mfg.
E&C
We expect L&T to clock USD 16bn in revenues by 2012
Total 25% 631
* 5 new businesses such as defense, thermal power equipment, shipbuilding, nuclear and railways
6
New business initiatives –Key long term earnings drivers
7
New15%
Existing85%
Thermal power equipments ShipbuildingDefense
Larsen & Toubro – Foray into five new potential billion dollar businesses
Nuclear power Railways
20GW of supercritical projects to be awarded over the next five years
(Rs bn) 2007 2012ERevenue NA 27 EBITDA NA 4.0
World shipbuilding order book has been growing at 29% over 2003-06. Current global market estimated at USD 20bn
(Rs bn) 2007 2012ERevenue NA 25 EBITDA NA 6.2
Expect 40GW of Nuclear projects to be awarded
by 2007-2012
(Rs bn) 2007 2012ERevenue NA NA EBITDA NA NA
•Indian Railways to spend USD 68bn for
modernization, expansion, freight
corridor, etc.
(Rs bn) 2007 2012ERevenue NA NA EBITDA NA NA
DOFA estimates India’s defense market to reach USD 30bn by 2012 from
USD 10bn in 2007
(Rs bn) 2007 2012ERevenue 6 42 EBITDA 1.5 8.4
New businesses: Opportunity snapshot
Key drivers for 2010-2012 Drivers beyond 2012
Power29%
Defense44%
Ship building27%
Source: Company, ENAM Research
8
Defense45%
L&T’s strategy is to specifically target the imported equipmentsCurrently ~50% of the USD 10bn defense capital procurements are importedAcquired Spectrum, a defense R&D company with capabilities in strategic electronics and AerospaceAwaiting 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
Industry size 2007 ( Rs bn)
Manufacturing missile guiding systems, rocket launchers, etc.Weapon System & Sensors Radar Platforms, Sonar Systems & Electronic Warfare SystemsDeveloping products with DRDO
Industry growth(FY07-12E)
India’s defense mkt. stands to USD 21.7bn in FY07.DOFA estimates India’s defense market at USD 100bn and an offset opportunity of USD10bn over next 5 years
L&T FY08ESales (Rs bn)
L&T market share by 2012
L&T growth YoY
Defense: Sales and EBITDA trends
45 34% 8.1 3% 47%
Scope of work Drivers
Estimated ROI
40%
We expect L&T to clock USD 900mn in revenues by 2012 with an OPM of 25%
0
10
20
30
40
50
FY07 FY10E FY12E
(Rs mn)
Sales EBITDA
9
Power plant equipment29%
Industry size 2007 ( Rs bn)
Captive & Cogen power plantsRenovation and modernization (R&M)Operation and maintenance (O&M)Balance of plant and EPCForaying into manufacturing boilers & turbines
Industry growth(FY07-12E)
As per XIth plan, 68GW of generation capacity is to be commissioned by 2012Of the above, 47GW of thermal projects are yet to be awarded. Of these ~50% of these are based on super critical technology
L&T FY08Esales (Rs bn)
L&T market share by 2012
L&T growth YoY
PPE: Business Economics
230 15% NA 20% NA
Scope of work Drivers
Estimated ROI
30%
We expect peak revenues at Rs 40bn and a sustainable OPM of 18%
Particulars (Rs mn)Capex for fixed assets 16,000Peak revenues 56,000EBIT @ sustainable margin of 15% 8,400PAT @ sustainable PATM of 10% 5,600Wkg cap requirement @ 20% of sales 11,200Assumed asset turns 3.5Sustainable ROI (%) 31Sustainable ROE at D:E of 1:1 (%) 41
Source: Company, ENAM Research
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 plantL&T’s current scope involves 55% of project cost ie balance of plant related EPC
10
Shipbuilding
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 14-16bnLarger frigates and submarines are currently being imported ; L&T is targeting this area
Offshore platforms JV with Sapura Crest, Malaysia for sub-sea pipe laying and installation of platforms
27%
Global industry size
2007 ( Rs bn)
LNG carriers and VLCC Submarines and Frigates for Indian NavyOffshore process platforms
Industry growth(FY07-12E)
Navy spend on ships currently at Rs 55bnCommercial shipbuilding to grow @ 15% to USD 22bn by 2020USD 15bn E&P capex for KG basin
L&T FY08ESales (Rs bn)
L&T market share by 2012
L&T growth YoY
1600 30% 2 < 1% 88%
Scope of work Drivers
Estimated ROI
25%
Excluding subsidies, we believe high-end shipbuilding can earn 25% RoI
Business EconomicsParticulars (Case without Subsidies) (Rs mn)Capex for fixed assets 20,000Peak revenues 50,000EBIT @ sustainable margin of 20% 10,000PAT @ sustainable PATM of 13% 6,500Wkg cap requirement @ 35% of sales 17,500Assumed asset turns 2.5Sustainable ROI 27Sustainable ROE at D:E of 1:1 35Source: Company, ENAM Research
11
Nuclear power projectsIndustry order
inflows 2007 (MW)
Construction of reactor core, civil construction and balance of plant Technological capability in Light water (LWR) , Pressurized heavy water (PHWR) , Fast breeder (FBR)
Industry order inflows
FY07-12E (MW)
INDO-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.
L&T FY08ESales (Rs bn)
L&T market share by 2012
L&T growth YoY
500 12,800* NA 10% NA
Scope of work Drivers
Estimated ROI
30%
L&T is the only Indian player with the technology for a nuclear reactor
Business economics
Particulars (Rs mn)Capex for fixed assets 10,000Peak revenues 40,000EBIT @ sustainable margin of 15% 6,000PAT @ sustainable PATM of 9% 3,600Wkg cap requirement @ 20% of sales 8,000Assumed asset turns 4.0Sustainable ROI 33Sustainable ROE at D:E of 0.5:1 40Source: 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 8GWL&T’s 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.
12
Railways
Indian Railways has staged a dramatic turnaround in recent years and is expected to post a revenues surplus of Rs 200bn in FY07
Indian Railways (IR) has seen a turnaround in its performance in the last three yearsIR 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 Corridors
L&T is targeting the BOOT opportunity in freight corridor and port connectivity projects
Railway electrificationTrack laying and bridge constructionTraffic facilitiesRolling stockSignaling and telecom worksMetro rails
Development of dedicated freight corridorsUpgradation of signaling and telecommunications systems Augmentation of capacity for Rolling Stock manufacturing Metro rail for cities like Mumbai, Bangalore and Hyderabad.
Railway: Plan outlayL&T’s target scope of work Opportunity for private players
Opportunity in Railways could be as large as roads
110136 141
190
300
50
100
150
200
250
300
FY04 FY05 FY06 FY07R FY08E
(Rs bn)
Source: Budget DocumentsSource: Company, ENAM Research
13
Existing businesses have a strong foothold
14
Estimated CAGR of 25% in domestic investments over FY08-12E
Source: Crisinfac, ENAM Research
Driven by a surge in domestic capex…
Private Sector Dominated
Public – Private Partnership
Public Sector Dominated
Economic Slowdown Rising interest ratesIncreasing lead time for equipments
Rising interest ratesTraffic growth
Collection risk
High commodity prices High utilization levelsAvailable natural resources
Movement of goods – Urbanization/ Globalization
Power shortage
Investor Class DampenersDrivers
Rs bn FY03-FY07 FY08-FY12E CAGR (%)Industrial Capex 1,584 4,914 25%Steel 141 1,000 48%Aluminum 20 205 59%Cement 60 400 46%Paper 56 148 21%Fertilisers 40 93 18%Textiles 26 60 18%Petrochemicals 20 200 58%Oil & gas 1,040 2,498 19%Automobiles 181 310 11%
Rs bn FY03-FY07 FY08-FY12E CAGR (%)Infrastructure 3,511 10,500 24%Roads 1,225 3,687 25%Airports 41 408 58%Railways 797 2,714 28%Ports 337 870 24%Real Estate 1,111 2,821 20%
Rs bn FY03-FY07 FY08-FY12E CAGR (%)Power 2,765 9,637 28%Power Generation 1,798 5,367 24%Power T & D 967 4,270 35%
Capex and Growth Trends
15
L&T International FZE
Middle East
Hydrocarbons & InfrastructureSaudi Arabia, Oman, UAE, Qatar, Kuwait
Coal GasificationElectrical std productsSourcing & Global Manufacturing
China
0
200
400
600
800
Cons
truc
tion
Oil&
Gas
Petc
hem
Pow
er
Indu
stry
Wat
er&
Was
te
(USD bn)
Underway Advanced planning stage Early planning stage
Robust outlook for GCC nationsNational income avg. 19% growth in 2002-06GCC governments added almost USD 500bn to net foreign assets over 2002-06
USD 1.25 trillion in planned public and private projects over 2007-12E
USD 330bn in oil & gas and power sectors -L&T’s forte
L&T has expanded capacities in anticipation of growth
Modular fabrication facility in Oman for servicing offshore, refining, petchem and chemical sectorsElectrical switchgear & switchboard facility in China for servicing demand from the housing segment
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
Petro dollars are fuelling infra spend in GCC
Source: Company, NBK Economic Research, ENAM Research
Key International Operations
… further aided by the boom in GCC & China
16
Changing sector dynamics to favor L&T
Avg. order size for ~4.5K kms of BOT roads to increase to ~300kms from ~100kms earlierPrivatization of Ports and Airports30GW of 12th plan Hydroprojects to be ordered in 11th
plan
Changing sector dynamics …
India Inc on greenfield addition spree: Steel: 25 MMTPA over 2007-12Aluminum: 1 MMTPA over 2007-12Cement: 100MMTPA over 2007-12
Upstream exploration capex of USD 30bn by RIL, ONGC & others for KG discoveryPSU refiners to add 86MMTPA during 2007-12RIL & IOC to spend USD 5bn for Petchem expansion
InfrastructureInfrastructure HydrocarbonsHydrocarbons IndustrialIndustrial
….to benefit L&T
Corporate clients are incrementally favoring large organized players like L&T for timely delivery and quality control
Oil & gas requires complex engg. skills and very few Indian players such as L&T have the pre-qualification and the balance sheet to handle large projects
Rising order size to reduce competitive intensity and improve margin profileIncreased net worth norms
Corporate capex is adequate to meet demand growth
Rs 152bnEst. revenues
by 2010 Rs 142bn Rs 69bn
Share of revenues by 2010 36% 34% 17%
17
Manufacturing: Key profitability contributor
Refinery and fertilizer plant modernization in IndiaShipbuilding and nuclear reactorsRefineries, petrochemical & fertilizer plants in Middle EastCoal gasification projects in China, South America & Middle East
Sector opportunity
Domestic construction boomUp-tick in mining activitiesLarge capex in user industries like cement, coal, iron ore, wind energy, paper
Infrastructure & real estate boom in India & Middle EastDomestic power programs like rural electrification etc Upsurge in corporate capex NHDP program fueling growth for petrol dispensing stations
Rs 29bnEst. revenues
by 2010
Heavy EngineeringHeavy Engineering Electricals &Electronics
Electricals &Electronics
Machinery & Industrial Products
Machinery & Industrial Products
Rs 40bn Rs 35bn
L&T’s initiatives
Adding distributorship with Komatsu mining eqip., ScaniaMultiaxle trucksJV in China for valves manufacturingAugmenting production/ servicing capacity
Electrical products facility in China for global sourcingNew facility in Coimbatore for electrical systems & products, and petrol dispensing pumps & systems
Capacity augmentation at Mumbai & Coimbatore plantsFocusing on high margin complex Aviation, Aerospace & Defense sectors.Export thrust
Share of revenues by 2010
FY07-10 revenue CAGR
2%* 10% 8%
34% 25% 21%
EBITDA margins 25% 18% 18%
* Adjusting for defense and shipbuilding
18
Subsidiaries with value unlocking potential
19
Others1%
Product engineering
services17%
Energy & Petchem
17%
Manufacturing32%
Insurance23%
BFSI10%
L&T Infotech… The gen-next offshore playL&T Infotech: A marquee player
Present in high-growth segments of engineering services, embedded systems and ADM services Strong domain expertise in product engineering services, manufacturing and energy/ petrochem
A fast growing USD 1bn business (FY10) with strong operating levers
Engineering and embedded systems will lead the next offshore waveScalable: Expected employee base of 21,000+ in FY10E This compares favorably against Tech Mahindra’s Q1FY08 employee base of 21,000+
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 57:43Expected reduction of leverage from the present levels of 1:1. This will improve net realizations for investors
Net Profit: Sensitivity to growth and margins
Value/share: Sensitivity to exchange rate and P/E
Business Verticals: USD 300mn (FY07)
(USD mn)35 40 45 50 55
11 81 90 100 111 12213 95 106 118 131 14415 110 123 136 151 16617 125 139 154 171 18919 139 155 173 191 211
NP
M (
%)
Sales CAGR (%)
(Rs/ share)292 35 37 39 41 438 77 91 107 124 144 10 114 135 158 184 212 12 158 186 218 254 294 14 209 247 289 336 389 16 267 315 369 429 497
P/E
(x)
INR/USD
Source: Company, ENAM Research
20
L&T IDPL: The dark horse3 year old Infrastructure subsidiary - 78.4% held by L&T
Project status: Rs 87.5bn worth of infra projects (roads & bridges, ports and airports) with L&T’s equity commitment of Rs 11.6bn, are under implementationL&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 projectAll road projects should have 100% stakeThreshold IRRs in case of non–revenue 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 years
Cost Equity Stake (%)
L&T equity
IRR (%)
on BV of equity
EV (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8
Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7
Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230
Source: Company, ENAM Research
21
Financial evaluation: RoI to expand over long term
0
100
200
300
400
500
FY06 FY07 FY08E FY09E FY10E
(Rs bn)
Construction Manufacturing InfotechFinance Others
Expect 27% CAGR in revenues over FY07-10EInfrastructure and hydrocarbon investments to drive 29% CAGR in construction revenues through FY07-10EManufacturing biz. i.e. Electrical, MIP and Heavy Engg. to sustain 28% CAGR over FY07-10EInfoTech and Finance subs to continue it growth trend
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 FY07Ability to improve margins by optimally allocating fungible talent and reduction in number of sites
Free cash flow generation beyond FY09Major capex required of USD 1.5bn over FY08-10 to achieve targeted growth of 30% 5-year CAGRFunding 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
Improving revenue mix
Source: Company, ENAM Research
FCF/ ROI trend
(22,000)
(11,000)
0
11,000
22,000
2006 2007 2008 2009 2010
(Rs mn)
18
20
22
24
26
28
30(%)
FCF (LHS) RoCE (RHS)
22
Construction
BODBOD
Non executive Directors
A M Naik, CMDA M Naik, CMD
Succession planning
ESOPs
Merit based compensation structure
Restructuring of mgmt. cadre
E & C Projects Heavy EngineeringElectricals & Electronics MIP IT & Technology
Services
K V RangaswamiK V Rangaswami K. VenkatramanK. Venkatraman M. V. KotwalM. V. Kotwal R. N. MukhijaR. N. Mukhija J. P. NayakJ. P. Nayak V.K. MagapuV.K. Magapu
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 leaders will graduate to the board level as an CEO of each SBUs
Cascading the program to various levelsA company wide endeavor covering over 4,000 managers has been launched to hone abilities and translate skills into effective leadership and motivationSelect employees are also sent to premier business schools to gain experience and knowledge through Advanced Management Programs
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 leaders will graduate to the board level as an CEO of each SBUs
Cascading the program to various levelsA company wide endeavor covering over 4,000 managers has been launched to hone abilities and translate skills into effective leadership and motivationSelect employees are also sent to premier business schools to gain experience and knowledge through Advanced Management Programs
Corporate governance
Strategic supervision
Leadership development
Financial Services,
Finance & HR
Y.M. DeostahleeY.M. Deostahlee
Retaining talent through…
Shortening the learning curve
‘Campus to corporate program’
‘Anytime learning program’
Attracting talent by …
7 Exec. Dir/ SBU Heads
23
Key constraints/ risksExecution risk
Time and cost over-runs during project execution could impact our earnings assumptionsL&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&T’s 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&T’s key raw material inputs comprise metals, cement, bitumen etc. - A sharp surge in raw material prices impacts margins adverselyHowever, 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 sectorsEntry into these sectors may be delayed in case of unexpected hurdles/ political impediments
24
SOP Valuation
Cost Equity Stake (%)
L&T equity
IRR (%)
on BV of equity
EV (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3Ports 29.9 6.0 - 2.83 - - 8.8
Kakinada Seaports Ltd 4.0 0.8 39% 0.31 25% 3.1 1.0ISPL Haldia Ltd 1.3 0.3 22% 0.06 25% 3.1 0.2Dhamra Port Company Ltd 24.6 4.9 50% 2.46 25% 3.1 7.7
Bangalore International Airport Ltd 19.3 6.4 17% 1.1 40% 5.0 5.5UIL 25.0 12.5 100% 12.5 25% 3.1 39.1Other Real Estate - UIL 12.8 6.4 75% 4.8 25% 3.1 14.9Total - - - 28.9 - - 85.6L&T's Stake @ 78.4% - - - - - - 67.1Value per share of L&T - - - - - - 230
Source: Company, ENAM Research
L&T IDPL (BOT Projects)
SOP -> Rs 2,923
-2,923 Value per Share (Rs)
-34 Less Debt FY10
based on ENAM TP of Rs946
12x FY10E EPS
12x FY10E EPS
3x P/BV
12.5x of FY10E EV/EBITDA
Comments
46
89
218
230
2,373
Value per share
Value of 11.5% stake of Ultratech Ltd
L&T Finance (Financing construction equipments)
L&T Infotech (Product engg., Energy/ Petchem, Mfg.)
IDPL ( BOT projects)
Core Business
Particulars
25
DCF ValuationRs bn FY08E FY09E FY10E FY11E FY12E FY13E FY14E _ _ FY20E
Key Assumptions (%)
Cost of equity 13.0
Cost of debt (post tax) 5.6
WACC 9.3
Terminal growth rate of cash flow 0
Operating EBIT 34.5 44.3 55.9 74.2 84.7 93.1 108.5 239.4
plus: Taxes 9.8 12.6 14.0 18.6 21.2 23.3 27.1 59.9
NOPLAT 24.8 31.7 41.9 55.7 63.6 69.8 81.4 179.6
less: Depriciation 4.6 6.1 7.1 8.5 9.7 10.9 12.1 23.1
Gross Cash Flow 29.3 37.8 49.0 64.2 73.3 80.7 93.5 202.7
less: changes in operating WC 8.8 10.8 15.8 -3.5 16.6 15.4 16.1 34.5
Operating Cash Flow 20.5 26.9 33.2 67.7 56.7 65.3 77.4 168.2
less: Capex 20.0 20.0 15.0 21.7 19.7 18.8 21.5 40.7Free Cash Flow 0.5 6.9 18.2 46.0 37.1 46.5 56.0 127.5
Terminal value 1,371
PV FCF and terminal value 767
Net debt 22
Investments* 81
Equity value 870
Shares o/s (m) 292
Equity value per share (Rs) 2,981
CMP 2,432
Upside (%) 23
Source: Company, ENAM Research, * IDPL/Ultratech Cement
26
Company FinancialsIncome statement Key ratios
Source: Company, ENAM Research
Y/E March 2007 2008E 2009E 20010E
Net sales 203,315 263,100 337,815 417,080Other operating income 3,494 4,193 5,031 6,037Total income 206,809 267,293 342,846 423,118
Cost of goods sold 160,016 207,373 266,736 328,352 Contribution (%) 23 23 23 23 Advt/Sales/Distrn O/H 17,319 20,826 25,773 31,761
Operating Profit 29,474 39,094 50,337 63,004 Other income 1,663 2,284 1,816 1,692
PBIDT 31,137 41,378 52,153 64,696 Depreciation 3,413 4,559 6,050 7,100 Interest 2,460 4,207 4,207 4,154 Other pretax 0 0 0 0Pre-tax profit 25,264 32,611 41,895 53,441 Tax provision 7,438 9,783 12,569 16,032 (-) Minority Interests 1,162 1,151 1,296 1,380 Associates 951 1,141 1,369 1,643Adjusted PAT 17,615 22,818 29,400 37,672E/o income / (Expense) 4,787 0 0 0
Reported PAT 22,401 22,818 29,400 37,672
Y/E March 2007 2008E 2009E 20010E
Sales growth 24.0 29.4 28.4 23.5
OPM 14.5 14.9 14.9 15.1 Oper. profit growth 35.5 32.6 28.8 25.2 COGS / Net sales 77.4 77.6 77.8 77.6 Overheads/Net sales 8.4 7.8 7.5 7.5 Depreciation / G. block 5.6 5.0 5.5 5.6 Effective interest rate 5.5 7.0 7.0 7.0
Net wkg.cap / Net sales 18.8 18.5 17.4 17.3 Net sales / Gr block (x) 3.9 3.5 3.4 3.5
Incremental RoCE 18.3 34.9 39.3 48.9 RoCE 25.8 25.4 27.6 29.6 Debt / equity (x) 0.8 0.6 0.5 0.4 Effective tax rate 29.4 30.0 30.0 30.0 RoE 28.1 26.9 27.5 27.8 Payout ratio (Div/NP) 18.8 21.1 19.3 18.8
EPS (Rs.) 60.3 78.2 100.7 129.0 EPS Growth 24.7 29.5 28.8 28.1 CEPS (Rs.) 74.2 96.7 125.2 158.1 DPS (Rs.) 14.9 17.0 20.0 25.0
(Rs mn) (%)
27
Company FinancialsBalance sheet Cash flow
Source: Company, ENAM Research
Y/E March 2007 2008E 2009E 20010E
Total assets 140,619 159,772 184,803 215,274 Gross block 61,146 90,838 110,838 125,838 Net fixed assets 39,568 64,700 78,650 86,549 CWIP 14,692 5,000 5,000 5,000 Investments 0 0 0 0 Wkg. cap. (excl cash) 44,386 53,214 64,060 79,910 Cash / Bank balance 37,685 32,570 32,805 39,527 Others/Def tax assets 4,288 4,288 4,288 4,288
Capital employed 140,619 159,772 184,803 215,274 Equity capital 567 567 567 567 Reserves 74,656 93,809 118,840 150,811 Borrowings 60,100 60,100 60,100 58,600 Others 5,297 5,297 5,297 5,297
Y/E March 2007 2008E 2009E 20010E
Sources 57,072 23,713 31,081 37,571 Cash profit 21,045 27,387 35,377 44,509 (-) Dividends 4,216 4,815 5,665 7,081 Retained earnings 16,829 22,572 29,712 37,428 Issue of equity 5,886 0 0 0 Borrowings 30,469 0 0 (1,500) Others 3,888 1,141 1,369 1,643
Applications 57,072 23,713 31,081 37,571 Capital expenditure 28,231 20,000 20,000 15,000 Investments 0 0 0 0 Net current assets 12,312 8,828 10,846 15,850 Change in cash 16,529 (5,115) 235 6,721
(Rs mn) (Rs mn)
28
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CONFLICT OF INTEREST DISCLOSUREWe, 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 Yes2. Firm ownership of the stock No3. Directors ownership of the stock No4. Investment Banking mandate No5. Broking relationship No
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