| Summary of Contents STOCK IDEA Larsen & Toubro
Cluster: Evergreen
Recommendation: Buy
Price target: Rs4,428
Current market price: Rs3,536 Numero uno! Key points - Proxy play on country's infrastructure story: Larsen & Toubro (L&T), being the largest engineering and construction (E&C) company in India, is a direct beneficiary of the strong domestic infrastructure boom and industrial capital expenditure (capex). Strong infrastructure spend is set to ensure strong growth momentum in the company's order inflows. We estimate the overall order inflows for the company to grow at a CAGR of 20.7% between FY2007-10.
- International business driving growth: The contribution of international revenues has grown from 4% to 17.5% in the last five years and is expected to reach 25% by FY2010. Gulf Corporation Council (GCC) nations offer immense business opportunity ($1.25 trillion) over the next six years, which augurs well for company like L&T.
- New initiatives to drive growth beyond FY2010: We believe there lies an immense opportunity in the new verticals in which the company is entering namely ship building, defense, railways, thermal and nuclear power. Given the company's excellent track record, we are quite confident of its success in these initiatives and are also encouraged by higher returns on investments in these segments.
- Margin expansion: We believe there is a scope for further improvement in the margins on the back of rising operational efficiencies, larger ticket-size and more complex nature of orders, better raw material sourcing and integration, and higher contribution of its new businesses that carry higher margins.
- Subsidiaries picking up in size: We believe some of the subsidiaries of L&T, particularly L&T Infotech, L&T Finance and LT FZE have reached critical size and importance, making L&T a true conglomerate and a diversified play.
- Valuations: Sound execution track record, bulging order book, and strong performance of subsidiaries reinforces our faith in L&T. We value the core business of L&T at 28x FY2010E earnings, or Rs3,403 per share, while we value the subsidiaries at Rs1,025 per share of L&T. At the current market price of Rs3,536, the stock is trading at 21.9x its FY2010E consolidated earnings. We recommend a Buy on the stock with our sum-of-the-parts based price target of Rs4,428.
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