Friday, March 2, 2012

>LARSEN TOUBRO: Presence in diversified businesses LIKE Turnkey projects, construction, engineered products & systems, electrical & electronic products & systems, IT& Engineering services, Machinery Valves etc

 Best stock to play the Indian infrastructure theme
We believe L&T is best placed to benefit from the gradual recovery in the capex cycle, given its diverse exposure to sectors, strong balance sheet and cash flow generation as compared to its peers, which grapple with issues such as strained cash flow, high leverage and limited net worth and technological capabilities.

 Presence in diversified businesses
Larsen & Toubro’s business as a whole are diversified in nature with the presence in different areas of businesses like Turnkey projects, construction, engineered products & systems, electrical & electronic products & systems, IT& Engineering services, Machinery Valves & Industrial Consumables, Financial Services, Shipbuilding etc would help the company to withstand the concerns in particular sectors.

 Strong order book
As of 3QFY2012, L&T stands tall on an order backlog of 1, 45,768 crore against Rs 114,882 crore at the end of Q3 FY11 and Rs 142,185 crore at the end of Q2 FY12. With the current order book, book to book ratio (BTB ratio) stands at 3x its TTM revenue. L&T’s order book is majorly dominated by the infra (40%) and power (29%) segments. Process (15%), hydrocarbon (11%) and others (5%) constitute the balance part of the order book.

 Outlook and Valuations: Attractive; Initiate Coverage with ‘BUY’
Larsen and Toubro (L&T) had posted good set of numbers for 3QFY2012, which mainly on account of robust top-line growth and higher other income. Order inflow for the quarter grew by stunning 28.2% to 17,129 crore covering some of the lost ground in 1HFY2012. We prefer L&T over its peers being the market leader and fundamentally the strongest infrastructure company. We maintain L&T as our top pick in the sector. Hence, we initiate a ‘Buy’ recommendation on Larsen with the target price of Rs. 1433 with a ‘Buy’ below Rs.1075 for those who have a moderate to aggressive risk appetite, as the stock looks very attractive at the current levels, given the steep price correction in the recent past and the improved outlook on the infrastructure space going ahead. Risks At the macro level, the current global economic scenario is the most worrying risk factor, as a fall of the global economy into a double-dip recession may lead to a slower growth in our economy. Apart from that, the other concerns include the stiff competition in each of the industries which would cause aggressive bidding and a drop in order inflow, persistence of the higher interest rate leading to drop etc. The company may also get affected by the delays in the execution of the long gestation projects, which might affect the cash flow from the projects that have a specific concession period. Apart from these, the increasing debt level also poses some risk to the future journey of L&T as it will increase the financial burden in the form of interest. The company’s debt to equity ratio, currently, stands at 1.52:1, which is further poised to go up as more projects are set to kick in.

To read the full report: L&T