>LARSEN & TOUBRO (BNP PARIBAS)

■ Upgrade to BUY, from Hold
The stock has returned 4% since October 2009 (Sensex: +0.2%) since our HOLD recommendation. We now upgrade L&T to BUY, due to our greater confidence about its earnings growth prospects, as a result of strong order bookings during the last quarter (95% y-y increase) and better execution (revenue growth of 28% y-y). In our view, the risks to order flow and execution have subsided, and we estimate order inflow growth of 25.6% in FY11 (INR803b), revenue CAGR of 30% (backed by a strong E&C order book of INR997b) and earnings CAGR of 25% during FY10-12. Risks to our recommendation and TP include quarterly earnings volatility, a slowdown in order intake, poor execution, margin contraction and dilution from raising capital. Catalysts for the stock include 1) higher than expected orders, 2) unlocking of value in technology services, finance or infrastructure subsidiaries.

■ Improved order inflow, execution issues behind us
Our concerns on order growth on a high base have been mitigated by visible market opportunity (discussed in the note). Regulatory changes in the infrastructure sector have accelerated the order award process. We forecast INR803b (25.6% y-y) in orders for L&T over FY11 on an
improved outlook resulting from, in particular, public spending on infrastructure development; 70% of our order inflow estimate should come from infrastructure and power. The 12th plan (FY13-FY17) is likely to have an outlay of USD1t (2x 11th Plan), we believe the emphasis on
infrastructure sector will continue during that period as well. We believe execution speed bumps (financial closure, election/ political issues) are behind us, signified by a robust 28% y-y revenue growth in Q4FY10.

■ Flight to quality in uncertain times
We believe L&T is in a better position to withstand any global crisis compared to its smaller peers. In a scenario of risk-aversion due to uncertainties in the European region, we believe L&T represents a relatively better choice within the sector. The company has successfully demonstrated this by posting 23% earnings CAGR during the FY08-FY10, where several of its peers had earnings decline in at least one of the years.

■ Valuation
We arrive at our TP to INR1,933 based on an SOTP valuation of L&T and its subsidiaries. The standalone company now contributes INR1,644 by applying a 14x EV/EBITDA multiple on our FY12E EBITDA estimate (INR1313 based on 15.0x FY11 EV/EBITDA multiple earlier). Our multiple is in line with the 5-year historically traded median multiple. Subsidiaries now contribute INR289 (INR228 earlier) based on their respective metrics.

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