L&T: Enhancing value

Even as prospects in its core business are looking up, the move to separately list subsidiaries should boost shareholder value.

Larsen and Toubro’s stock has outperformed the broader markets in the recent past, gaining 12 per cent in the past month versus 9.9 per cent for the Sensex. While its move to separately list its finance subsidiary has propped up sentiment, a large part of the up-move in the stock could be attributed to the pick-up in the engineering and construction sector. We look at these developments and what it means for the company and its shareholders.

L&T Finance
With L&T filing the prospectus for listing of L&T Finance Holding, its 100 per cent subsidiary, the process of unlocking has begun. L&T Finance Holding, through its various subsidiaries, is well placed in terms of offering financial products and services, investments products (via L&T Mutual Fund) and infrastructure financing, most of which are fast-growing segments. Its asset base has grown at an annual rate of 77 per cent in the past five years through March 2010, to Rs11,491 crore, while net profits have grown by 62 per cent to Rs267 crore during the same period.
 

STURDY RISE
In Rs crore	FY10	FY11E	FY12E
Revenue	43,970	52,219	66,463
OPM (%)	14.6	14.5	14.7
Net profit	3,497	4,378	5,583
EPS (Rs)	58.1	70.0	89.0
PE (x)	35.5	29.5	23.2
Note: L&T Consolidated Financials, “E” stands for analysts estimate

 

UNLOCKING VALUE
Company	L&T IDPL*	L&T Finance
L&T’s stake (In %)	84.3	100
Business	Infra Assets	Financial
Revenue (Rs cr)	1427	1423.9
Net profit (Rs cr)	88	263
Per share value (Rs)**	80-100	60-75
* L&T IDPL financials are estimated for FY10, ** Of L&T

The move to garner about Rs1,500 crore through the proposed Initial Public Offer should help L&T Finance sustain healthy growth in its businesses of infra lending and financing. At some point in time, L&T Finance may also seek a banking licence, which should help re-rate the stock.

As on August, L&T Finance had 715 points of presence across India, including 103 branch offices and 221 meeting centres. The company wants to increase its presence, in area and products. Analysts value L&T’s stake in this company at about Rs60-75 per share and believe there is additional room of about Rs50 per share, post listing.

L&T IDPL
After the IPO of L&T Finance, L&T is likely to take up the listing of L&T Infrastructure Development Projects (L&T IDPL), which could happen in the next financial year. L&T aims to leverage its execution and EPC (engineering-procuremrnt-construction) capabilities and understanding of the infrastructure industry, to further expand its presence in the business of infrastructure assets.

Its achievement, so far, has been enviable. L&T IDPL, which has 37 projects worth Rs33,500-40,000 crore spread across sectors like roads, ports, railways and real estate, has emerged as a key player. The company has 15 road projects, seven operational. Once all projects commence fully, it could translate into annual revenue of about Rs2,000 crore, estimates the company. Its Dhamra Port (50 per cent JV with Tata Steel) project with 27-million tonne capacity will commence operation, soon followed by Kattupalli Port in Tamil Nadu (expected to commence by December 2011). The company is also active in railways, airports and real estate. Considering its diversification, large asset size, strong pipeline of infra projects and support of L&T, this subsidiary could create large value for L&T shareholders, albeit in the long run.

Core strength
Apart from the scope to unlock value, L&T's core businesses of engineering and construction is also witnessing a good revival. This can be attributed to recovery in the capital goods sector, especially power, and increased activity in the construction space. During the June quarter, L&T reported a strong growth of 63 per cent in order intake, resulting in an order book of Rs1,07,800 crore (revenue visibility of two years).

Its revenues and profits over the next two years are expected to grow at 22-25 per cent. The benefits of a favourable industry environment, strong engineering capabilities and move to unlock value should reward investors in the long run. Given the recent run-up, while there is limited near-term upside from the current level of Rs2,053, investors with a longer-term perspective could consider the stock on dips.