Growing fast, fairly valued

With Larsen & Toubro bagging the Rs 12,132-crore Hyderabad Metro rail project, the company’s order book position has started to look stronger. This provides strong revenue traction for the company, even as the valuations look to be fair at the moment. The company has now obtained orders worth Rs 21,444 crore since April.

According to analysts at Goldman Sachs, this is around 28 per cent of the new order inflow for the current financial year. This will also keep the company on track to achieve 27 per cent sales growth between FY10 and FY12, they add.

The Metro project
The 71-km elevated Metro rail project will be built under a PPP (public-private partnership) model on a DBFOT (design, build, finance, operate and transfer) basis with a concession period of 35 years. The viability gap funding (VGF) – which the government provides in the form of grants, one-time or deferred, to infrastructure projects with a view to make them commercially viable – would be around Rs 1,460 crore.
 

CONNECTING CITIES
In Rs crore	FY10	FY11E	FY12E	FY13E
Revenues	43,970	53,433	66,084	82,000
Ebitda	6,439	7,192	8,709	11,021
Net profit	3,497	4,277	5,286	6,662
EPS (Rs)	58.1	71.1	87.8	110.7
PE (x)	32.3	26.4	21.4	17.0
Source: Religare

The internal rate of return (IRR) for the project is estimated to be around 15 per cent for the company, according to Goldman Sachs, based on the ticketing revenue estimates and possible real estate development. But, apart from this, the company would also gain from the engineering, procurement and construction (EPC) contracts from the project. According to analysts at Religare, there would be an additional inflow of around Rs 8,000 crore on account of the project (excluding rolling stock).

With a VGF of around Rs 1,460 crore, the debt funding requirement for the project will be Rs 10,500 crore. As the debt-to-equity ratio for the project reaches 70:30, L&T will need to invest Rs 3,150 crore over the next four years. With cash of around Rs 9,900 crore and strong cash-flows from its businesses, L&T is well-placed to meet the Rs 3,150-crore requirement. The company is required to achieve financial closure within six months of the award, which does not look difficult.

Outlook
L&T has built substantial strength in the railways segment, having bagged the Mumbai monorail project of Rs 1,360 crore and the Rs 3,000-crore Chennai Metro project. It also has a stake of around 15 per cent in the Kalindi Rail Nirman, which is engaged in signal and track-laying business. On the whole, L&T has been witnessing good order inflows, led by an improving economic growth that provides revenue visibility. Analysts expect the company’s revenues and earnings to grow 20-25 per cent annually over the next two years.

At Rs 1,874, the stock is currently trading at 26.4 times and 20.3 times its 2010-11 and 2011-12 estimated earnings, respectively. The five-year mean price-to-earnings (PE) ratio for the company is around 20 times. The valuation, therefore, looks to be fair with an upward bias when the order book starts to pick up as capital expansion plans for India Inc pick up.