L&T to expand ship-building, defense businesses' share in order book

Aims to improve return on capital employed over next 2-3 yrs by exiting non-core businesses that are not scalable

Larsen & Toubro (L&T), the Indian engineering conglomerate, is set to expand the share of ship-building and defense businesses in its order book over the next couple of years, its senior management told analysts in a recent meeting.

"We met up with L&T management recently and came back positive on its medium to long-term business potential and new business initiatives...Ship-building, defense (businesses) to gain size going ahead," Amit Mahawar, analyst with brokerage Edelweiss Securities, wrote in his note to clients.

The company aims to improve its return on capital employed over the next two to three years by exiting non-core businesses that are not scalable and plans to optimize the current manufacturing base in ship-building, defense, heavy forgings and power equipment.

L&T has entered into a joint venture with Mazgaon Dock for submarines and expects potential of major orders in defense vessels and submarine. The company currently has Rs 1,500 crore worth of orders in hand for interceptor boats for the Indian Navy and few more for commercial vessels.

Hence, these businesses are expected to have higher share incrementally in the company's order book in the next couple of years.

"Our visit to the company boosted our confidence on the order intake and earnings growth outlook in the near to medium term. Order inflows in power EPC (engineering, procurement, and construction), ship-building, defense, and heavy forgings would help L&T reposition itself over the long-run. Any major traction on the policy front clearly poses a major upside risk to our growth assumptions for 2012-13 and 2013-14," Mahawar said.

The brokerage has recommended its clients to "buy" L&T stock and has set a target price of Rs 1,587 per share. At 10:42 am, L&T shares were traded at Rs 1,464 on the National Stock Exchange (NSE), up 3.2% from previous close.