>Larsen & Toubro (BNP PARIBAS)

Delays likely in infra projects.....

Takeaways from meeting with K Venkatesh, CEO L&T Infrastructure Development Projects Ltd (IDPL) on March 26.

Company estimates opportunity of INR750b in near-term
These opportunities exist across highways (NHAI + state), ports, railways, water, power transmission and hydropower. L&T is considering approximately 50% of this total opportunity; the company is cautious about bidding for Public Private Partnership (PPP) projects due to complex regulations. Government regulations and policies are primarily responsible for delays. Some projects have become commercially unviable due to change in policy/regulation. As a result, achieving financial closure for these projects is challenging.

Highways offer near-term opportunities, but are risky
National Highway Authority of India (NHAI) has reduced concession periods for several projects resulting in lower IRRs, so project finance is difficult to obtain. NHAI has also capped the upside from increase in traffic estimates. State government projects are preferable as there is a single-point regulatory clearance; however, annuities and projects with Viability Gap Funding (VGF) face cash flow mismatch risk. L&T is wary of servicing debt obligations with cash flows from the state governments.

Select opportunities in railways, ports, and transmission
The New Delhi Railway Station redevelopment project (INR90b), Mumbai Metro Line 2 (INR76.5b) and Bangalore high speed rail link (INR45b) are under consideration vs total opportunity of INR331b in railways. In ports, the container terminal contract at Ennore port
(INR13b) and coal import terminal project at Mormugoa port (INR6b) are the only projects that are attractive, with a total opportunity of INR86b. Power transmission offers an INR109b opportunity and the company is considering INR67b of these.

Valuation
We maintain our REDUCE rating on L&T due to lower order intake and elongation of the execution cycle of existing orders. We maintain our INR536 TP based on our SOTP valuation (INR460 from standalone based on 8.5x FY10E EBITDA + INR76 from subsidiaries).

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