>Larsen & Toubro (MORGAN STANLEY)

Reassessing the Impact of Capex Slowdown; Retain OW

Investment conclusion: We continue to believe that L&T is a key stock to own in the India construction space as its record of gaining market share amid slowdowns over the last 15 years should stand it in good stead over the next few years. We also believe that L&T’s loss on
the Satyam bidding process and its guidance of strong order inflows in F2010 (YoY growth of 25-35%) has removed the two largest overhangs on the company.

What's new: We are lowering our F2009E and F2010E EPS by 14% and 27%, respectively, to adjust for the capex slowdown, which while easing, continues to be worse than we earlier expected. The cut is mainly on the back of our assumption that L&T’s order execution period goes up 24% to 27 months over F2009-11E, leading to L&T’s revenue growth slowing to 20%. We also account for the higher impact of the slowdown on L&T’s subsidiaries vs. our previous expectations.

Where we differ: We believe that consensus has turned too bearish on the capex cycle and does not give L&T credit for its long history of market share gains in such environments. Despite conservative assumptions, we are around 10-20% ahead of consensus on F2009-11E EPS and believe that the strong F2010 order inflows L&T recently guided to will result in F2011
earnings surprising on the upside.

What’s next: We believe that award of the negotiated order from NTPC (expected in late C2009) and order by ONGC, as well as L&T’s win percentage in those orders, will be the next big drivers. As well, we continue to believe that the growth in order bookings and revenues
and the YoY change in margins over the next three to four quarters will be the drivers of stock performance.

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