>Larsen & Toubro (HSBC)

● We remain cautious in our outlook on FY10 order accretion, given slowing new orders from the metals and mining, oil and gas, and real estate sectors. Management has guided that c5-8% of the INR688bn order backlog will be delayed. We expect domestic oil and gas capex to be led by Oil and Natural Gas Corporation Ltd (ONGC). ONGC projects capex of INR1,300bn in the 11th Five-Year Plan vs its 10th Plan capex of INR740bn, up 75% (with a FY10 capex budget of cINR208bn). Also, the Gas Authority of India Ltd (GAIL) is committed to cINR145bn in capex by 2011 and cINR141bn post-FY11.

● Shift in mix to infrastructure and power sector orders. We expect the power equipment manufacturing business and railways and shipbuilding ventures to start contributing to revenue in FY11, driving growth for the company in the long term. In the first nine months of 2009, infrastructure and power contributed c65% of new orders (vs 38% in FY08).

● Satyam acquisition news remains a hangover. We maintain that, given our cautious outlook on L&T’s core business, the potential Satyam acquisition entails risk related to the commitment of management’s time and other liabilities. Also, the acquisition may not be EPS accretive in the initial years, given uncertainties related to client traction and cost structure.

● Change in estimates. We have reduced our revenue estimates c4% to incorporate expected delays in project execution. We expect L&T to trade in a MACC range of 10.5-14.5% and a CROIC range of 8.5-9.5%. Based on this, we value L&T’s core business at INR544 per share (10.6x FY10e EPS). We value L&T’s subsidiaries at INR116 (previously INR131) per share. Hence, we reduce our target price to INR660 (from INR765).

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