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Preparing for next phase of growthVisit to L&T's Hazira manufacturing and fabrication facilities

We visited L&T's Hazira (Surat, Gujarat) faci l ity, one of its largest manufacturing

and fabr icat ion faci l i t ies, spread over 750 acres. I ts operations include heavy

engineering, modular fabrication, shipbuilding, making of boilers, turbines special

steels and heavy forg ings. I t employs 4,000 professionals and engages 14,000-

18,000 people on a contractual basis. We met Mr Ravi Uppal, CEO of L&T Power.

L&T positive on the power equipment business: Mr Ravi Uppal, CEO of

L&T Power, sees strong demand for power equipment, backed by aggressive

power generation capacity additions. A rise in per capita power consumption,

boosted by economic growth, will trigger fresh capacity addition. Growing

focus on the lifecycle cost of power equipment will benefit local manufacturers

such as L&T.

BTG plant an impressive set up: L&T has two JVs with Mitsubishi Heavy

Industries (MHI) to make boilers (L&T MHI Boiler) and turbines (L&T MHI

Turbines), and holds 51% stake in each. The facilities, set up with an investment

of Rs36b, have efficient manufacturing processes, and will achieve a high

degree of localization by 2014-15. L&T's BTG facility is India's largest single-

location integrated manufacturing plant. We were impressed with the facilities.

However, L&T will still be dependent on imports for critical components like

turbine-blades but over time, other processes such as rotor machining will be

done indigenously.

Uniquely placed in heavy engineering , modular fabrication facilities a

key strength:The Heavy Engineering Systems division makes static products

for core sectors. The business has design and quality specifications of various

agencies and several firsts to its credit. The Modular Fabrication Facility (MFF)

at Hazira is one of its three fabrication yards, with area of 475,000sq meters.

The fabrication facilities are the core of L&T's success in sectors like

hydrocarbons, shipbuilding and power.

Well placed to capitalize on long-term demand: Lack of decision makingby the government and an uncertain policy environment are impacting

infrastructure spending and hence L&T's order intake. L&T's order backlog is

worth Rs1,148b (up 26% YoY), implying BTB ratio of 2.7x TTM. 9MFY11 order

intake was Rs495b, up 8% YoY, lower than L&T's FY11 order intake guidance

of 25%. Our FY11 intake assumption is Rs748b (up 7.5% YoY) and Rs921b

(up 23% YoY) in FY12. L&T is the best play on capex and will benefit from a

likely pick up in demand.

Valuation and view: We expect L&T to post consolidated earnings CAGR of

20% over FY11-13. However, slower growth in order-intake in FY12 can impact

FY13 revenue growth (current estimate 21%). Our target price is Rs1,905 onan SOTP basis, with target multiple for L&T standalone at 22x FY12E EPS.

Maintain Buy.

Dhirendra Tiwari ([email protected]); Tel: +91 22 3982 5127

Navneet Iyengar ([email protected]); Tel: +91 22 3029 5126

The InSites

Larsen & Toubro

A bird's eye view of the Hazira site

Boiler pipings

Financial snapshotY/E March FY10 FY11 FY12 FY13

Sales (Rs b) 373.6 455.8 565.0 685.2

EBITDA (Rs b) 47.4 56.3 66.4 81.4

PAT (Rs m)* 37.1 44.9 54.1 74.2

EPS (Rs)# 61.6 74.5 89.9 123.2

EPS Growth (%) 19.7 20.9 20.7 37.1

BV/Share (Rs) 304.1 348.3 399.8 462.4

P/E (x)# 25.4 21.1 17.4 12.7

P/BV (x) 5.2 4.5 3.9 3.4

EV/EBITDA (x) 20.8 17.8 15.4 12.7

EV/Sales (x) 2.6 2.2 1.8 1.5

RoE (%) 19.8 19.0 19.4 20.4

RoCE (%) 23.1 21.9 21.0 21.8

* Consolidated, # Consolidated, fully diluted

Takeaways from site visits

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Preparing for next phase of growth

We visited L&T's Hazira (Surat, Gujarat) facility, which is among L&T's largest

manufacturing and fabrication facilities, spread over 750 acres. Its operations include

heavy engineering, modular fabrication, shipbuilding, the manufacture of boilers, turbines,special steels and heavy forgings. Hazira is home to L&T's heavy engineering business.

L&T's two power equipment manufacturing JVs, L&T-MHI Boiler and L&T-MHI Turbine,

also have manufacturing facilities in Hazira. L&T is setting up manufacturing facilities for

ESP (Electro Static Precipitators), high pressure piping and axial fans/dearators (which

are not part of the MHI-JVs), which are critical parts of utility-grade boilers.

The facility employs 4,000 professionals and engages 14,000-18,000 people on a contractual

basis.

A bird's eye view of the Hazira site

BTG building

Source: Company/MOSL

L&T's Hazira facility's

operations include heavy

engineering, modularfabrication, shipbuilding,

manufacture of boilers,

turbines, special steels and

heavy forgings

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Highlights of discussions with Mr Ravi Uppal, CEO of L&T Power

India is unlikely to see power surplus situation in the next 10 years due to likely boom

in per capita consumption. Power demand is driven by supply. With increasing supply,

demand will grow exponentially, from industrial, commercial and residential sectors.

India's aim of achieving power generation capacity of 800GW by 2030 is conservativeand should be achieved. China has capacity of 950GW and is expected to reach over

1,500GW over the next few years. India's growth will necessitate similar power

generation capacity.

Coal is an issue but will be sorted out in due course of time. India has abundant coal

reserves, which will be able to meet its requirement for several decades. China produces

nearly 3b tonnes of coal and imports nearly 0.5b tonnes. There is no reason why India

cannot achieve such targets with a little more focus.

India's power generation aims imply capacity addition of over 30GW a year over the

next three Five Year Plans, creating strong demand for power equipment makers in

India. There is increasing focus on the lifecycle cost of power equipment. Chinese equipment

carry higher lifecycle costs and Indian developers are reluctant to use them. L&T

expects more Indian power producers to opt for Indian power equipment makers.

Total effective domestic equipment manufacturing capacity is unlikely to exceed 30GW

a year over the next 5-7 years. Some new entrants in the power equipment

manufacturing industry may face headwinds in future. The Indian market will accept

technology from players with a proven track record.

L&T has manufacturing capacity of 4,000MW a year, which can be stretched to

5,000MW. Capacity expansion will depend on market growth. Currently, L&T is

executing 10,000MW. A phased localization programme is underway and by FY15, the process will be

indigenized.

L&T will maintain similar EBITDA margin as in core business.

BTG manufacturing facility an impressive set up

L&T has two JVs with Mitsubishi Heavy Industries (MHI) to make boilers (L&T MHI

Boiler) and turbines (L&T MHI Turbines) and it owns 51% stake in each. The facilities

have started production and are expected to attain a high percentage of localization by

2014-15. The facilities, set up with an investment of Rs36b, conform to global standards,

with a high degree of process efficiencies. L&T's BTG facility is India's largest single-

location integrated manufacturing plant. We were impressed with the facilities. The JVs

are still dependent on imports, from MHI (rotor machining and turbine-blades). However,

we expect indegenization to increase in the long run.

L&T's two JVs to make

boilers and turbines, set up

with an investment of Rs36b,

have a high degree of

process efficiencies

India's aim of achieving

power generation capacity

of 800GW by 2030

is conservative

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A view of the turbine facility: Rotor assembly Boiler component

TG factory Boiler component


L&T MHI JVs

Turbine Boiler

JV formed Nov - 07 Nov - 07

L&T's stake (%) 51 51

Capacity, annual 4GW 4GW

Technologies Steam Turbine - MHI Boiler - MHIGenerators - MELCO

Localization Phase 1 - FY11 Phase 2 - FY13

Phase 3 - FY15 Phase 1 - FY11

Phase 2 - FY13 Phase 3 - FY15

Order book 13 units, 9.1GW 11 units, 7.5GW


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Forging facility

In November 2009 L&T formed a JV with NPCIL to produce special steels and ultra

heavy forgings. The JV will supply finished forgings for nuclear reactors, pressurizers and

steam generators, besides heavy forgings for critical equipment in the hydrocarbon sector

and for thermal power plants. The project cost was Rs17.25b and the plant is due to becompleted in April 2011. The unit will start exports by FY13. The initial capacity will be

10,000 tonnes a year, which will be ramped up to 40,000 tonnes in a phased manner.

The company's forging facility is expected to be among India's most sophisticated. Initially,

it will have a 9,000MT press and 17,000MT is being proposed. The facility, which will

have an electric arc furnace and a ladle refining furnace, will be able to produce ingots of

up to 600MT.

Heavy Engineering & Systems (HES)

The Heavy Engineering & Systems business makes static products for core sectors. The

business, which has design and quality specifications of various agencies, has several

firsts to its credit. The segment recently delivered 22 numbers of 1,540-tonne HCR/ARDS

reactors to KNPC, Kuwait, which is a significant milestone.

Modular Fabrication Facility (MFF)

Modular fabrication facilities are the core of L&T's strength. These are facilities and

yards, where the company fabricates large structures for diverse industries.

Modular Fabrication Yard Fabrication Area

Hazira, Gujarat 475,000sq meters

Sohar, Oman 400,000sq meters

Kattupalli, Tamil Nadu 450,000sq meters


The company is expected to increase the fabrication area of Kattupalli to 1m sq meters.

The Oman and Kattupalli yards will also be used for deep-water products.

An FCC reactor for a refinery A large tubular reactor


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Shipyard

L&T's shipbuilding facility in Hazira has been created to cater to growing global demand

for construction of specialized ocean-going vessels. The yard includes prefabrication

facilities such as shot blasting and priming, a CNC cutting machine, semi panel line

fabrication, unit assembly bay, block assembly and a slipway to launch vessels along witha jetty to outfit jobs for ships under construction.

The company also has a ship manufacturing facility at Kattupalli. While it can make 150-

meter long vessels at Hazira, its Katupalli works can make upto 200-meter long ships. The

company specializes in niche products and does not make VLCCs and bulk carriers.

Outlook: Ready for the next phase of growth

External environment challenging, long-term prospects promising: Lack of

decision making by government and an uncertain policy environment is impacting

infrastructure spending and hence L&T's order intake. Consequently L&T's order

intake is likely to moderate. L&T's order backlog is Rs1,148b (up 26% YoY), implying

a BTB ratio of 2.7x TTM. Order intake in 9MFY11 was Rs495b, up 8% YoY, which

was lower than L&T's FY11 order intake guidance of 25% YoY. Our FY11 intake

assumption is Rs748b (up 7.5% YoY) and Rs921b (up 23% YoY) for FY12. We

believe L&T is the best play on capex and will benefit from a likely pick up in demand.

Strong growth in power, infrastructure; hydro-carbon sector disappoints: Order

intake from the power and infrastructure sectors grew significantly in 9MFY11, rising

13% and 41%, respectively. However, the hydrocarbon sector has slowed considerably

during the year, with orders from the segment declining 62% YoY in 9MFY11. There

has been intensifying competition in the hydrocarbons sector with new entrants like

Essar Services and Punj Lloyd quoting aggressive prices. L&T expects strong ordering

from the segment over the next few quarters.

New growth areas still to take off: L&T sees growth opportunities in new domains

such as railways, shipbuilding, defense and nuclear power. However, the lack of

initiatives by the government even on planned programs is cause for concern. The

railways and defense sectors have significant potential and may provide upsides over

the next two years.

Challenging to maintain margins: It will be challenging to maintain EBITDA margins

due to intensifying competition and rising commodity prices. We expect EBITDA

margin to decline to 12.1% in FY12 from 12.6% in FY11.

Working capital improved over the past two years, may deteriorate: L&T's

net working capital improved to 8% of sales in FY11 from 14% in FY09. The company

expects working capital to trend towards the normal 15% over the next three years,

driven by slower order intake and a higher share of public sector orders.

L&T's order intake is likely

to moderate, but we believe

L&T is the best play on

capex and will benefit from a

likely pick up in demand

L&T expects

working capital to

trend towards 15% over

the next three years from

8% of sales in FY11

The company's ship building

facility in Hazira can make

up to 150-meter long vessels

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Power, infrastructure sector orders drive growth Revenue contribution from the power sector will go up


13 14 13 12 11 16

20 20 21 25 2222

14 11 1317 21

27

31 32 3230 37

26

22 24 2210 1015

FY06 FY07 FY08 FY09 FY10 FY11E

Process industries Oil &Gas Power Infrastructure Others

10 14 15 16 13 12 12

26 1525

12 208 9 10

1012

1425

33

37 37 37

30 4231 39

2734 33 32

24 17 15 8 7 9 9 9

12

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E

Process Oil &Gas Power Infrastructure Others

Target price of Rs1,905

Business segment Method Valuation Value Value

multiple (Rs m) (Rs/sh)

L&T Standalone Engineering, Construction, FY12E PER (x) 22 900,453 1,495

& Electricals

L&T Infotech (100% stake) Infotech FY12E PER (x) 16 45,945 76

L&T Infrastructure Dev.Projects Ltd. Infrastructure 50,400 84

L&T Finance Hire Purchase, Leasing, Book Value 2.0 29,008 48

Bill Discounting

L&T Infrastructure Finance Infrastructure Finance Book Value 2.0 18,067 30

International Ventures (L&T FZE) FY12E PER (x) 12 35,561 59

Manufacturing Ventures

Power Equipment Thermal BTG FY14E PER (x) 12 49,426 82

L&T Komatsu Excavators and FY12E PER (x) 12 19,625 16

Hydraulic System

Audco India Industrial Valves FY12E PER (x) 12 13,206 11EWAC Alloys Welding FY12E PER (x) 12 4,125 3

Total 1,905


FY11 intake growth lowest since FY03 BTB remains strong despite slower FY11 growth

22

23

8

35

23

37

37

49

142

128

212

4

22

9

36

41

20

13

3

234

28

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

Intake (% YoY) Revenues (% YoY)

170

179

247

369

527

703

1,002

1,298

1,657

2,102

1.71.4

1.72.1 2.1 2.1

2.72.9 3.0

3.1

FY04

FY05

FY06

FY07

FY08

FY09

FY10E

FY11E

FY12E

FY13E

Order Backlog (Rs.b) BTB (x) -RHS

Valuation and view

We expect L&T to post consolidated earnings CAGR of 20% over FY10-13. However,

slower growth in order-intake in FY12 (15% v/s current estimate of 23%) can impact

FY13 revenue growth (current estimate of 21%).

Our target price is Rs1,905 on an SOTP basis and a target multiple for L&T standalone

at 22x FY12E. Maintain Buy.

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L&T: Financials and Valuation

Income statement (Rs Million)

Y/E March 2009 2010 2011E 2012E 2013E

Total Revenues 343,370 373,556 455,834 564,991 685,225

Growth Rate (%) 35.9 8.8 22.0 23.9 21.3

Excise Duty 3,985 3,208 3,914 4,852 5,884

Net Revenues 339,385 370,348 451,920 560,139 679,341

Growth Rate (%) 36.1 9.1 22.0 23.9 21.3

Mfg. Expenses 262,716 284,536 339,716 423,871 513,637

Staff Cost 19,745 23,791 28,550 34,260 41,112

S G &A Expenses 17,948 14,627 27,350 35,594 43,169

EBITDA 38,977 47,393 56,304 66,415 81,423

Change (%) 35.0 21.6 18.8 18.0 22.6

EBITDA Margin (%) 11.5 12.6 12.5 11.9 12.0

Depreciation 2,828 3,797 4,957 6,207 7,457

EBIT 36,149 43,597 51,347 60,207 73,966

Net Interest 4,156 5,053 6,503 7,494 8,894

Other Income 6,142 7,416 9,761 9,582 10,578Profit before Tax 39,404 58,806 54,618 62,309 75,663

Tax 12,312 16,409 17,205 18,693 22,699

Effective Tax Rate (%) 31.2 27.9 31.5 30.0 30.0

Reported Profit 27,092 54,902 38,122 43,616 52,964

EO Adjustments 7,910 12,504 708 0 0

Adjusted Profit 26,968 42,398 37,414 43,616 52,964

Growth (%) 30.5 57.2 -11.8 16.6 21.4

Cons. Profit (Adj) 30,046 37,110 44,852 54,134 74,212

Growth (%) 31.1 23.5 20.9 20.7 37.1

Balance sheet (Rs Million)Y/E March 2009 2010 2011E 2012E 2013E

Equity Capital 1,171 1,204 1,204 1,204 1,204

Reserves & Surplus 123,426 181,912 208,527 239,554 277,232

Net Worth 124,597 183,116 209,731 240,759 278,436

Debt 65,560 68,008 94,557 119,557 134,557

Deferred Tax Liability 485 774 774 774 774

Capital Employed 190,642 251,899 305,063 361,090 413,767

Gross Fixed Assets 55,905 72,901 99,143 124,143 149,143

Less : Depreciation 14,762 17,841 22,798 29,005 36,462

Add : Capital WIP 10,803 8,742 4,500 4,500 4,500

Net Fixed Assets 51,946 63,802 80,845 99,638 117,181

Investments 82,637 137,054 127,130 121,959 111,785

Current Assets 223,244 263,472 328,382 412,370 507,777

Inventory 14,705 14,154 37,466 61,917 93,866

Sundry Debtors 99,031 111,637 162,352 201,230 234,666

Cash & Bank 7,753 14,319 27,316 28,257 35,345

Loans & Advances 58,194 59,975 101,248 120,966 143,900

Other Current Assets 43,561 63,388 0 0 0

Current Liabi lities 167,188 212,429 231,294 272,877 322,976

Net Current Assets 56,056 51,044 97,088 139,493 184,801

Capital Deployed 190,642 251,899 305,063 361,090 413,767

E: MOSL Estimates

Ratio

Y/E March 2009 2010 2011E 2012E 2013E

Basic (Rs)

Adjusted EPS 46.0 50.5 62.1 72.4 88.0

Growth (%) 30.5 9.6 23.1 16.6 21.4

Consolidated EPS 51.3 61.6 74.5 89.9 123.2

Growth (%) 31.1 20.1 20.9 20.7 37.1

Con. EPS (Fully Diluted)51.5 61.6 74.5 89.9 123.2

Growth (%) 31.1 19.7 20.9 20.7 37.1

Cash Earning per Share 49.9 57.4 70.4 82.7 100.3

Book Value 212.7 304.1 348.3 399.8 462.4

Dividend Per Share 10.2 12.6 15.5 18.1 22.0

Div.Payout %(Incl.Div Tax) 26.5 20.7 28.9 28.9 28.9

Valuation (x)

P/E (Standalone) 35.0 31.1 25.2 21.6 17.8

P/E (Consolidated) 31.4 25.4 21.1 17.4 12.7

P/E (Cons.) (Fully Diluted) 31.4 25.4 21.1 17.4 12.7

Price / CEPS 31.4 27.3 22.3 19.0 15.6

EV/EBITDA 25.4 20.8 17.8 15.4 12.7

EV/ Sales 2.9 2.6 2.2 1.8 1.5

Price / Book Value 7.6 5.2 4.5 3.9 3.4

Dividend Yield 0.7 0.8 1.0 1.2 1.4

Return Ratio (%)

RoE 24.5 19.8 19.0 19.4 20.4

RoCE 26.2 23.1 21.9 21.0 21.8

Turnover Ratios

Debtors (Days) 105.3 109.1 130.0 130.0 125.0

Inventory (Days) 15.6 13.8 30.0 40.0 50.0

Asset Turnover (x) 1.8 1.5 1.5 1.6 1.7

Leverage Ratio

Current Ratio (x) 1.3 1.2 1.4 1.5 1.6

D/E (x) 0.5 0.4 0.5 0.5 0.5

Cash flow statement (Rs Million)

Y/E March 2009 2010 2011E 2012E 2013E

PBT before EO Items 39,404 58,806 54,618 62,309 75,663

Add: Depreciation 3,073 4,159 4,957 6,207 7,457

Interest 4,156 5,053 6,503 7,494 8,894

Less: Direct Taxes Paid 12,312 16,409 17,205 18,693 22,699

(Inc)/Dec in WC -31,720 11,579 -33,047 -41,464 -38,221

CF from Operations 2,601 63,188 15,826 15,853 31,095

(Inc)/Dec in FA -18,495 -16,015 -22,000 -25,000 -25,000

(Pur)/Sale of Invest. -13,415 -54,416 9,923 5,171 10,173

CF from Invest. -31,910 -70,431 -12,077 -19,829 -14,827

(Inc)/Dec in Net Worth 9,021 25,185 0 0 0

(Inc)/Dec in Debt 29,720 2,448 26,549 25,000 15,000

Less: Interest Paid 4,156 5,053 6,503 7,494 8,894

Dividend Paid 7,168 8,771 10,798 12,589 15,287

CF from Fin. Activity 27,418 13,809 9,248 4,917 -9,181

Inc/Dec of Cash -1,892 6,566 12,997 941 7,087

Add: Beginning Balance 9,645 7,753 14,319 27,316 28,257

Closing Balance 7,753 14,319 27,316 28,257 35,345

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MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement

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This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be requiredfrom time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide

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