>LARSEN & TOUBRO (INDIABULLS)

Promising future; but fairly valued

Larsen & Toubro (L&T) reported mixed results for Q1’10 with an 11% yoy growth in sales but a 20% yoy decrease in order inflows (excluding the RMC business). We believe the Company will be a key beneficiary of the Government of India’s (GOI) infrastructure spending; however, considering the recent run-up in the share price, we believe the stock is fairly valued and continue to maintain the Hold rating.

Large fiscal spending holds promise: To provide impetus to the current sluggish economic growth, the government is looking at boosting spending on infrastructure, removing policy bottlenecks, and simplifying the procedures for project approvals. L&T has vast experience in a wide range of infrastructure projects and a proven track record of executing such projects efficiently. Thus, the Company is likely to be one of the biggest beneficiaries of the government's increased spending on infrastructure. Accordingly, we have upwardly revised L&T's order book growth for FY10 to 25% as against our earlier estimate of a 20% growth in the previous quarter.

Operating margin expected to remain stable: L&T’s operating margin improved by 68 bps yoy in Q1’10 to 10%, mainly due to a 94 bps yoy increase in the margin of the Engineering and Construction (E&C) segment as a result of a) a larger proportion of orders that crossed the margin recognition threshold and b) a reduction in the cost of materials. We expect the Company's operating margin to largely remain stable in the remaining quarters of FY10 due to the relatively lower commodity prices (compared with H1’09) and the management’s discretion in picking up projects with higher margins.

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