Larsen & Toubro: Re-rating on the cards

The process of value unlocking has begun with plans to list finance and asset subsidiaries.

Larsen & Toubro’s (L&T’s) decision to list finance and infrastructure assets subsidiaries in the second half of 2010-11 and 2011-12, respectively, will unlock immense value, as both the businesses have extensive growth potential.

According to reports, L&T Finance Holdings, the recently formed holding arm of L&T Finance and L&T Infrastructure Finance, proposes to file for an initial public offer to raise Rs 1,500 crore by diluting 15-20 per cent stake. This values the entire finance vertical at Rs 10,000 crore compared to analysts’ estimates of Rs 3,500 crore. Consequently, the share of the finance business in L&T’s total market capitalisation comes to about eight per cent, compared to analysts’ fair value estimate of 2.4 per cent.

During 2007-10, the combined loan book, revenue and net profit of the finance vertical grew at a compounded annual growth rate of 57 per cent, 70 per cent and 58 per cent to Rs 10,949 crore, Rs 1,416 crore and Rs 267.6 crore, respectively. Even in the June quarter, while L&T’s core business exhibited a muted performance, revenues from the finance companies jumped 53 per cent year-on-year to Rs 435 crore and net profit more than doubled to Rs 106 crore.

L&T, which holds around 86.5 per cent in Infrastructure Development Projects (IDPL), plans to buy the remaining 13.5 per cent from IDFC Private Equity and JP Morgan Chase for Rs 740 crore, valuing the company at Rs 5,300 crore, or 4.3 per cent of L&T’s market capitalisation. With assets worth Rs 40,000 crore, IDPL is looking to expand in high-potential sectors like railways and water.

L&T’s standalone business is in a sweet spot, with all its businesses witnessing strong traction. The company has already cornered about 40 per cent of the targeted order inflows for 2010-2011 and is confident of 25 per cent growth. Analysts advise investors to accumulate the stock as it is trading close to its fair value of Rs 2,113.