Larsen & Toubro - Enam

India Research Stock Data No. of shares Market cap 52 week high/low Avg. daily vol. (6mth) Bloomberg code Reuters code

Larsen & Toubro

: 284mn : Rs 691bn : Rs 2735/ Rs 1136 : 1mn shares : LT IN : LART.BO

Shareholding (%) Jun-07 QoQ chg Promoters FIIs MFs / UTI Banks / FIs Others

: : : : :

0.0 17.8 15.8 22.4 43.9

Relative to Sector:

0.0 (0.4) 0.8 0.2 (0.5)

Rs 2,432 Target Price: Rs 2,923

Outperformer

Potential Upside: 20%

Relative Performance 300 200

From cyclical to secular growth

100 0 Jun-06

Dec-06

Jun-07

Sensex

L&T

Source: ENAM Research, Bloomberg

Financial summary Y/E March

Sales (Rs mn)

PAT (Rs mn)

2007 2008E 2009E 20010E

206,809 267,293 342,846 423,118

17,615 22,818 29,400 37,672

Consensus EPS* (Rs.) 78.1 102.1 134.8

EPS (Rs.) 60.3 78.2 100.7 129.0

Change (YoY %) 25 30 29 28

P/E (x)

RoE (%)

RoCE (%)

26.8 31.1 24.2 18.8

28.1 26.9 27.5 27.8

25.8 25.4 27.6 29.6

EV/EBITDA (x)

DPS (Rs)

16.5 18.5 14.4 11.4

14.9 17.0 20.0 25.0

Source: *Consensus broker estimates, Company, ENAM estimates

Bhavin Vithlani

[email protected] (+91 22 6754 7634)

Shreya Doshi

Associate: Akshen Thakkar

[email protected] (+91 22 6754 7646) [email protected]

August 11, 2007 1

Table of contents Slide No. Â Investment Summary

3

 Building a robust business model

5

 New business initiatives are key long term earnings drivers

6

 Existing businesses have a strong foothold

13

 Subsidiaries with value unlocking potential

18

 Key Risk/Concerns

23

 Valuation

24

 Company Financials

26

2

Investment summary  Visibility enhanced beyond FY10 „

L&T’s initiatives in high RoI defense, power plant equipments, nuclear, shipbuilding and railway businesses are key earnings drivers beyond FY10

 Existing businesses have a strong foothold „ „ „

Order flows in infrastructure business to accelerate– Outlay of USD 350bn over 2007-2012E i.e. 24% CAGR Industrial capex of USD 200bn over FY07-12 i.e. 25% CAGR, mostly greenfield Petro dollars driving GCC’s USD 1.4trn capex

 Margins to improve by 110bps over FY07-10E „ „ „

2007

2010E

2012E

New businesses (ROI –30%)

3%

5%

15%

IT (ROI – 30%)

8%

10%

11%

Manufacturing (ROI-25%)

24%

23%

20%

E&C (ROI – 18%)

66%

62%

54%

ROI

Improving quality of order backlog Ability to optimally allocate key resources Favorable business environment

New businesses to cover E&C cyclicality L&T’s Business trajectory

„

Rising contribution from manufacturing, I.T and new businesses

 L&T IDPL and L&T Infotech– potential value unlocking opportunities  At CMP (Rs 2,432), adj. for IDPL and investments, the core business trades at 12.9x FY09E and 10.3x FY10E EV/EBITDA

Growth

 RoI to expand over the long term

E&C Business Cycle

2007

IT, defense and power – secular businesses

Time

2012

Source: Company, ENAM Research

3

SOP Valuation SOP -> Rs2,923 Particulars

Value per share

Comments

2,373

12.5x of FY10E EV/EBITDA

IDPL ( BOT projects)

230

3x P/BV

L&T Infotech (Product engg., Energy/ Petchem, Mfg.)

218

12x FY10E EPS

L&T Finance (Financing construction equipments)

89

12x FY10E EPS

Value of 11.5% stake of Ultratech Ltd

46

based on ENAM TP of Rs 946

Less Debt FY10

34

-

2,923

-

Core Business

Value per Share (Rs)

L&T IDPL (BOT Projects) Cost

Equity

Roads

38.3

7.7

Stake (%) 100%

Ports

29.9

6.0

-

L&T equity 7.67

IRR (%) 18%

on BV of equity 2.3

EV (Rsbn) 17.3

2.83

-

-

8.8

Kakinada Seaports Ltd

4.0

0.8

39%

0.31

25%

3.1

1.0

ISPL Haldia Ltd

1.3

0.3

22%

0.06

25%

3.1

0.2

24.6

4.9

50%

2.46

25%

3.1

7.7

19.3

6.4

17%

1.1

40%

5.0

5.5

UIL

25.0

12.5

100%

12.5

25%

3.1

39.1

Other Real Estate - UIL

12.8

6.4

75%

4.8

25%

3.1

14.9

Total

-

-

-

28.9

-

-

85.6

L&T's Stake @ 78.4%

-

-

-

-

-

-

67.1

Value per share of L&T

-

-

-

-

-

-

230

Dhamra Port Company Ltd Bangalore International Airport Ltd

Source: Company, ENAM Research

4

Building a robust business model 5 New biz. * IT/ Fin Mfg.

E&C

FY07-12E CAGR (%)

Sales 2012E ( Rs bn)

2007

2010

2012

ROI

3% 3%

5% 5%

15% 15%

30%

73%

94

8% 8%

10% 10%

11% 11%

30%

36%

72

24% 24%

23% 23%

20% 20%

25%

20%

124

66% 66%

62% 62%

54% 54%

18%

20%

340

25%

631

Total * 5 new businesses such as defense, thermal power equipment, shipbuilding, nuclear and railways

 We believe L&T is well geared to double its revenues to USD 10bn by 2010 by riding the domestic infra and corporate capex boom and Middle East hydrocarbons & construction boom  L&T’s strategy for mitigating cyclicality in existing businesses, in order to drive topline to USD 16bn by 2012, is to focus largely on technology oriented high RoI businesses „ „

Leveraging on its core engineering and construction strength, L&T has narrowed down on 5 new businesses, which it would be able to scale up to a “critical mass” L&T targets USD 1bn in revenues from each of the above mentioned five businesses

We expect L&T to clock USD 16bn in revenues by 2012 5

New business initiatives – Key long term earnings drivers

6

New businesses: Opportunity snapshot Larsen & Toubro – Foray into five new potential billion dollar businesses

Thermal power equipments

Defense

20GW of supercritical projects to be awarded over the next five years

DOFA estimates India’s defense market to reach USD 30bn by 2012 from USD 10bn in 2007

(Rs bn) Revenue EBITDA

2007 6 1.5

2012E 42 8.4

(Rs bn) Revenue EBITDA

2007 NA NA

2012E 27 4.0

Shipbuilding

Nuclear power

Railways

World shipbuilding order book has been growing at 29% over 2003-06. Current global market estimated at USD 20bn

Expect 40GW of Nuclear projects to be awarded by 2007-2012

Indian Railways to spend USD 68bn for modernization, expansion, freight corridor, etc.

(Rs bn) Revenue EBITDA

2007 2012E NA 25 NA 6.2

(Rs bn) Revenue EBITDA

Key drivers for 2010-2012

2007 NA NA

Source: Company, ENAM Research

(Rs bn) Revenue EBITDA

2007 2012E NA NA NA NA

Drivers beyond 2012 Ship building 27%

Existing 85%

2012E NA NA

•

Defense 44%

New 15% Power 29%

7

45%

Defense Industry size 2007 ( Rs bn)

Industry growth (FY07-12E)

L&T FY08E Sales (Rs bn)

L&T market share by 2012

L&T growth YoY

Estimated ROI

45

34%

8.1

3%

47%

40%

Scope of work „ „ „ „

Manufacturing missile guiding systems, rocket launchers, etc. Weapon System & Sensors Radar Platforms, Sonar Systems & Electronic Warfare Systems Developing products with DRDO

Drivers „ „

India’s defense mkt. stands to USD 21.7bn in FY07. DOFA estimates India’s defense market at USD 100bn and an offset opportunity of USD10bn over next 5 years

Defense: Sales and EBITDA trends 50 40 30 20 10 0

 L&T’s strategy is to specifically target the imported equipments „ „ „

(Rs mn)

FY07

FY10E

Sales

FY12E EBITDA

Currently ~50% of the USD 10bn defense capital procurements are imported Acquired Spectrum, a defense R&D company with capabilities in strategic electronics and Aerospace Awaiting Raksha Udyog Ratna status (RUR) from govt. for commencing its operations on a full scale

 MoU signed with EADS and Boeing for offsets „

Govt. has mandated 30% domestic content under an “offset clause” for any foreign defense or aviation related purchases

 L&T is building ‘Pinaka’ rocket launchers for two regiments of Indian army and is bidding for the USD 4bn modernization project of Bofors guns

We expect L&T to clock USD 900mn in revenues by 2012 with an OPM of 25%

8

29%

Power plant equipment Industry size 2007 ( Rs bn)

Industry growth (FY07-12E)

L&T FY08E sales (Rs bn)

L&T market share by 2012

L&T growth YoY

Estimated ROI

230

15%

NA

20%

NA

30%

Scope of work „ „ „ „ „

Captive & Cogen power plants Renovation and modernization (R&M) Operation and maintenance (O&M) Balance of plant and EPC Foraying into manufacturing boilers & turbines

Drivers „

„

As per XIth plan, 68GW of generation capacity is to be commissioned by 2012 Of the above, 47GW of thermal projects are yet to be awarded. Of these ~50% of these are based on super critical technology

PPE: Business Economics Particulars Capex for fixed assets Peak revenues EBIT @ sustainable margin of 15% PAT @ sustainable PATM of 10% Wkg cap requirement @ 20% of sales Assumed asset turns Sustainable ROI (%) Sustainable ROE at D:E of 1:1 (%)

(Rs mn) 16,000 56,000 8,400 5,600 11,200 3.5 31 41

Source: Company, ENAM Research

 L&T is setting up a 3,000MW super critical boilers & turbines manufacturing facility „

Â

50:50 JV with Mitsubishi for supercritical boilers and Toshiba for supercritical turbine generators (yet to be decided)

We expect ~20,000MW of super critical based plants to be ordered over the next 5 years „ „

Boilers + turbine generators form 45% of a thermal power plant L&T’s current scope involves 55% of project cost ie balance of plant related EPC

We expect peak revenues at Rs 40bn and a sustainable OPM of 18%

9

27%

Shipbuilding Global industry size 2007 ( Rs bn)

Industry growth (FY07-12E)

L&T FY08E Sales (Rs bn)

L&T market share by 2012

L&T growth YoY

Estimated ROI

1600

30%

2

< 1%

88%

25%

Scope of work „ „ „

LNG carriers and VLCC Submarines and Frigates for Indian Navy Offshore process platforms

Drivers „ „ „

Navy spend on ships currently at Rs 55bn Commercial shipbuilding to grow @ 15% to USD 22bn by 2020 USD 15bn E&P capex for KG basin

Source: Company, ENAM Research

Business Economics Particulars (Case without Subsidies) Capex for fixed assets Peak revenues EBIT @ sustainable margin of 20% PAT @ sustainable PATM of 13% Wkg cap requirement @ 35% of sales Assumed asset turns Sustainable ROI Sustainable ROE at D:E of 1:1

(Rs mn) 20,000 50,000 10,000 6,500 17,500 2.5 27 35

 L&T plans to leverage its high pressure vessels manufacturing capability for manufacturing LNG carriers up to 3,00,000 DWT  Submarines and frigates for the Indian Navy „ „

Scorpene submarines : Indian Navy to build 24 such vessels at estimated cost of USD 14-16bn Larger frigates and submarines are currently being imported ; L&T is targeting this area

 Offshore platforms „

JV with Sapura Crest, Malaysia for sub-sea pipe laying and installation of platforms

Excluding subsidies, we believe high-end shipbuilding can earn 25% RoI

10

Nuclear power projects Industry order inflows 2007 (MW)

Industry order inflows FY07-12E (MW)

L&T FY08E Sales (Rs bn)

L&T market share by 2012

L&T growth YoY

Estimated ROI

500

12,800*

NA

10%

NA

30%

Scope of work „ „

Construction of reactor core, civil construction and balance of plant Technological capability in Light water (LWR) , Pressurized heavy water (PHWR) , Fast breeder (FBR)

Drivers „

„

INDO-US nuclear treaty to be a big positive for the sector; NPCIL to double its target to 40GW by 2020. L&T to be a preferred contractor, considering its previous experience.

Source: Company, ENAM Research, * As per NPCIL plan of 20GW addition by 2020

Business economics Particulars

(Rs mn)

Capex for fixed assets

10,000

Peak revenues

40,000

EBIT @ sustainable margin of 15%

6,000

PAT @ sustainable PATM of 9%

3,600

Wkg cap requirement @ 20% of sales

8,000

Assumed asset turns

4.0

Sustainable ROI

33

Sustainable ROE at D:E of 0.5:1

40

 Indo-US treaty to be a big positive for the sector „ „

NPCIL to order additional USD14bn worth of 32 nuclear reactors of 1GW each at 4 sites of 8GW L&T’s export potential opened up post Indo-US nuclear deal.

 Current technologies developed through in-house R&D „

Â

Currently caters to ~55-60% of the scope of work associated with a nuclear power plant project

Exploring tie-ups with global majors such as Areva, Toshiba's Westinghouse Electric, GE, etc.

L&T is the only Indian player with the technology for a nuclear reactor 11

Railways L&T’s target scope of work „ „

„ „ „ „

Railway electrification Track laying and bridge construction Traffic facilities Rolling stock Signaling and telecom works Metro rails

Opportunity for private players „ „ „ „

Development of dedicated freight corridors Upgradation of signaling and telecommunications systems Augmentation of capacity for Rolling Stock manufacturing Metro rail for cities like Mumbai, Bangalore and Hyderabad.

300

Railway: Plan outlay (Rs bn)

300

250 190

200 150

136

141

FY05

FY06

110

100 50 FY04

Source: Company, ENAM Research

FY07R

FY08E

Source: Budget Documents

 Indian Railways has staged a dramatic turnaround in recent years and is expected to post a revenues surplus of Rs 200bn in FY07 „ „ „

Indian Railways (IR) has seen a turnaround in its performance in the last three years IR has an outlay of Rs 2.7trn during 2007-12 as compared to Rs 798bn during FY2002-07 IR is planning significant up-gradation in close co-ordination with the private sector wherever possible

 L&T has been working closely with the Ministry of Railway for the designing of Dedicated Freight Corridors „

L&T is targeting the BOOT opportunity in freight corridor and port connectivity projects

Opportunity in Railways could be as large as roads 12

Existing businesses have a strong foothold

13

Driven by a surge in domestic capex… Capex and Growth Trends

Investor Class Rs bn

Private Sector Dominated

Industrial Capex Steel Aluminum Cement Paper Fertilisers Textiles Petrochemicals Oil & gas Automobiles Rs bn

Public – Private Partnership

Public Sector Dominated

Infrastructure Roads Airports Railways Ports Real Estate Rs bn Power Power Generation Power T & D

Drivers

FY03-FY07

FY08-FY12E

CAGR (%)

1,584 141 20 60 56 40 26 20 1,040 181

4,914 1,000 205 400 148 93 60 200 2,498 310

25% 48% 59% 46% 21% 18% 18% 58% 19% 11%

FY03-FY07

FY08-FY12E

CAGR (%)

3,511 1,225 41 797 337 1,111

10,500 3,687 408 2,714 870 2,821

24% 25% 58% 28% 24% 20%

FY03-FY07 2,765 1,798 967

FY08-FY12E 9,637 5,367 4,270

CAGR (%) 28% 24% 35%

ƒ High commodity prices ƒ High utilization levels ƒ Available natural resources

ƒ

ƒ

Movement of goods – Urbanization/ Globalization

Power shortage

Dampeners

ƒ Economic Slowdown ƒ Rising interest rates ƒ Increasing lead time for equipments

ƒ Rising interest rates ƒ Traffic growth

ƒ Collection risk

Source: Crisinfac, ENAM Research

Estimated CAGR of 25% in domestic investments over FY08-12E 14

… further aided by the boom in GCC & China Key International Operations

 Robust outlook for GCC nations

L&T International FZE

 USD 1.25 trillion in planned public and private projects over 2007-12E

„

Modular fabrication facility in Oman for servicing offshore, refining, petchem and chemical sectors Electrical switchgear & switchboard facility in China for servicing demand from the housing segment

 L&T has now moved up the value chain and is a Tier 2 player for the Middle East  Expect revenues to double to USD 2bn by 2010

„ „ „

Coal Gasification Electrical std products Sourcing & Global Manufacturing

Petro dollars are fuelling infra spend in GCC 800

(USD bn)

600 400 200 0

Underway

Advanced planning stage

Water&Waste

„

„

Hydrocarbons & Infrastructure Saudi Arabia, Oman, UAE, Qatar, Kuwait

Industry

 L&T has expanded capacities in anticipation of growth

„

China

Power

USD 330bn in oil & gas and power sectors L&T’s forte

Construction

„

Middle East

Petchem

„

National income avg. 19% growth in 2002-06 GCC governments added almost USD 500bn to net foreign assets over 2002-06

Oil&Gas

„

Early planning stage

Source: Company, NBK Economic Research, ENAM Research

15

Changing sector dynamics to favor L&T Hydrocarbons Hydrocarbons

Infrastructure Infrastructure

„

Changing sector dynamics …

„ „

„

….to benefit L&T

„

Avg. order size for ~4.5K kms of BOT roads to increase to ~300kms from ~100kms earlier Privatization of Ports and Airports 30GW of 12th plan Hydro projects to be ordered in 11th plan

Rising order size to reduce competitive intensity and improve margin profile Increased net worth norms

Est. revenues by 2010

Share of revenues by 2010

„

„ „

„

Upstream exploration capex of USD 30bn by RIL, ONGC & others for KG discovery PSU refiners to add 86MMTPA during 2007-12 RIL & IOC to spend USD 5bn for Petchem expansion

Oil & gas requires complex engg. skills and very few Indian players such as L&T have the prequalification and the balance sheet to handle large projects

Industrial Industrial

„ „ „ „

„

India Inc on greenfield addition spree: Steel: 25 MMTPA over 2007-12 Aluminum: 1 MMTPA over 200712 Cement: 100MMTPA over 200712

Corporate clients are incrementally favoring large organized players like L&T for timely delivery and quality control

Rs 152bn

Rs 142bn

Rs 69bn

36%

34%

17%

Corporate capex is adequate to meet demand growth 16

Manufacturing: Key profitability contributor Electricals Electricals & & Electronics Electronics

Heavy Heavy Engineering Engineering

„ „

Sector opportunity

„ „

„ „

L&T’s initiatives „

Refinery and fertilizer plant modernization in India Shipbuilding and nuclear reactors Refineries, petrochemical & fertilizer plants in Middle East Coal gasification projects in China, South America & Middle East Capacity augmentation at Mumbai & Coimbatore plants Focusing on high margin complex Aviation, Aerospace & Defense sectors. Export thrust

Est. revenues by 2010

Rs 29bn

„ „ „ „

„ „

Infrastructure & real estate boom in India & Middle East Domestic power programs like rural electrification etc Upsurge in corporate capex NHDP program fueling growth for petrol dispensing stations

Electrical products facility in China for global sourcing New facility in Coimbatore for electrical systems & products, and petrol dispensing pumps & systems

Rs 40bn

Machinery Machinery & & Industrial Products Industrial Products

„ „ „

„

„ „

Domestic construction boom Up-tick in mining activities Large capex in user industries like cement, coal, iron ore, wind energy, paper

Adding distributorship with Komatsu mining eqip., Scania Multiaxle trucks JV in China for valves manufacturing Augmenting production/ servicing capacity

Rs 35bn

Share of revenues by 2010

2%*

10%

8%

FY07-10 revenue CAGR

34%

25%

21%

EBITDA margins

25%

18%

18%

* Adjusting for defense and shipbuilding

17

Subsidiaries with value unlocking potential

18

L&T Infotech… The gen-next offshore play Business Verticals: USD 300mn (FY07)

 L&T Infotech: A marquee player „ „

Present in high-growth segments of engineering services, embedded systems and ADM services Strong domain expertise in product engineering services, manufacturing and energy/ petrochem

Product engineering services 17%

 A fast growing USD 1bn business (FY10) with strong operating levers

 Margin increase to be greater than peers „

„ „ „

Higher operating levers as compared to peers. Currently has offshore revenue share of 43% and blended utilization rates of 63% Expect utilization to improve from current 63% to 73%+ Increased offshoring - FY07 onsite: offshore mix was at 57:43 Expected reduction of leverage from the present levels of 1:1. This will improve net realizations for investors

Energy & Petchem 17%

Insurance 23%

Net Profit: Sensitivity to growth and margins (USD mn) NPM (%)

„

Engineering and embedded systems will lead the next offshore wave Scalable: Expected employee base of 21,000+ in FY10E This compares favorably against Tech Mahindra’s Q1FY08 employee base of 21,000+

Manufacturing 32%

BFSI 10%

11 13 15 17 19

35 81 95 110 125 139

Sales CAGR (%) 40 45 90 100 106 118 123 136 139 154 155 173

50 111 131 151 171 191

55 122 144 166 189 211

Value/share: Sensitivity to exchange rate and P/E (Rs/ share) 292 8 10 12 14 16 P/E (x)

„

Others 1%

35 77 114 158 209 267

37 91 135 186 247 315

INR/USD 39 107 158 218 289 369

41 124 184 254 336 429

43 144 212 294 389 497

Source: Company, ENAM Research

19

L&T IDPL: The dark horse  3 year old Infrastructure subsidiary - 78.4% held by L&T „ „

Project status: Rs 87.5bn worth of infra projects (roads & bridges, ports and airports) with L&T’s equity commitment of Rs 11.6bn, are under implementation L&T IDPL in turn owns 75% of L&T Urban Infra (UIL). Real estate projects under its Urban Infra worth Rs 61bn with equity commitment of Rs 17.3bn

 Key principles of L&T IDPL „ „ „

To divest the projects wherein L&T does not have controlling stake i.e. < 51% stake in non-road project All road projects should have 100% stake Threshold IRRs in case of non–revenue sharing infrastructure projects to be 16% and 20% for real estate

 Plan for an IPO only when projects under implementation are equal to projects under operation (50:50) mix, which is likely after a minimum of two years Cost Roads

38.3

7.7

Stake (%) 100%

Ports

29.9

6.0

-

2.83

-

-

8.8

Kakinada Seaports Ltd

4.0

0.8

39%

0.31

25%

3.1

1.0

ISPL Haldia Ltd

1.3

0.3

22%

0.06

25%

3.1

0.2

Dhamra Port Company Ltd

Equity

L&T equity 7.67

IRR (%) 18%

on BV of equity 2.3

EV (Rsbn) 17.3

24.6

4.9

50%

2.46

25%

3.1

7.7

Bangalore International Airport Ltd

19.3

6.4

17%

1.1

40%

5.0

5.5

UIL

25.0

12.5

100%

12.5

25%

3.1

39.1

Other Real Estate - UIL

12.8

6.4

75%

4.8

25%

3.1

14.9

Total

-

-

-

28.9

-

-

85.6

L&T's Stake @ 78.4%

-

-

-

-

-

-

67.1

Value per share of L&T

-

-

-

-

-

-

230

Source: Company, ENAM Research

20

Financial evaluation: RoI to expand over long term  Expect 27% CAGR in revenues over FY07-10E „

„

„

Infrastructure and hydrocarbon investments to drive 29% CAGR in construction revenues through FY07-10E Manufacturing biz. i.e. Electrical, MIP and Heavy Engg. to sustain 28% CAGR over FY07-10E InfoTech and Finance subs to continue it growth trend

 Margin to expand 60bps over FY07-10E „

„

Favorable shift in order book mix; low margin roads down to 10% in FY07 from 20% in FY06, while high margin airports have increased from 5% in FY06 to 15% in FY07 Ability to improve margins by optimally allocating fungible talent and reduction in number of sites

 Free cash flow generation beyond FY09 „

„

Â

Major capex required of USD 1.5bn over FY08-10 to achieve targeted growth of 30% 5-year CAGR Funding capex through excess cash on books and internal accruals

RoI expand over longer term driven by rising share of high margins new business and IT

Improving revenue mix

500

(Rs bn)

400 300 200 100 0 FY06 Construction Finance

FY07 FY08E FY09E FY10E Manufacturing Infotech Others

FCF/ ROI trend 22,000

(Rs mn)

30

(%)

28

11,000

26 24

0

22

(11,000)

20 18

(22,000) 2006

2007

2008

FCF (LHS)

2009

2010

RoCE (RHS)

Source: Company, ENAM Research

21

Succession planning Corporate governance

A AM M Naik, Naik, CMD CMD

Strategic supervision

BOD BOD

Retaining talent through…

 ESOPs Non executive Directors

7 Exec. Dir/ SBU Heads

Construction

E & C Projects

Heavy Engineering

Electricals & Electronics

MIP

IT & Technology Services

Financial Services, Finance & HR

KK VV Rangaswami Rangaswami

K. K. Venkatraman Venkatraman

M. M. V. V. Kotwal Kotwal

R. R. N. N. Mukhija Mukhija

J.J. P. P. Nayak Nayak

V.K. V.K. Magapu Magapu

Y.M. Y.M. Deostahlee Deostahlee

Leadership development

  Each Each SBU SBU head head currently currently grooming grooming aa team team of of 55 people people „ „

~35 ~35 people people are are thus thus being being groomed groomed to to be be the the next next line line of of leaders; leaders; of of these these 5-7 5-7 new new leaders will graduate to the board level as an CEO of each SBUs leaders will graduate to the board level as an CEO of each SBUs

  Cascading Cascading the the program program to to various various levels levels „ „ „ „

AA company company wide wide endeavor endeavor covering covering over over 4,000 4,000 managers managers has has been been launched launched to to hone hone abilities and translate skills into effective leadership and motivation abilities and translate skills into effective leadership and motivation Select Select employees employees are are also also sent sent to to premier premier business business schools schools to to gain gain experience experience and and knowledge through Advanced Management Programs knowledge through Advanced Management Programs

 Merit based compensation structure  Restructuring of mgmt. cadre Attracting talent by … Â

Shortening the learning curve

Â

‘Campus to corporate program’

Â

‘Anytime learning program’

22

Key constraints/ risks  Execution risk „ „

Time and cost over-runs during project execution could impact our earnings assumptions L&T was penalized Rs 1bn during FY05 for time over-run in a project in the Middle East

 Talent retention and acquisition „

Retaining existing talent and acquiring new talent with proper know-how is key to L&T’s ability to expand into verticals – ship building, nuclear, aerospace, defense, etc.

 Interest rate risk „

Significant increase in interest rates impacts corporate capex and infrastructure investments adversely

 Commodity price volatility „

„

L&T’s key raw material inputs comprise metals, cement, bitumen etc. - A sharp surge in raw material prices impacts margins adversely However, most contracts have a built in price escalation clause

 Delay in new forays/ unexpected hurdles „ „

Aerospace, defense and nuclear sectors have traditionally been GOI/ PSU dominated sectors Entry into these sectors may be delayed in case of unexpected hurdles/ political impediments

23

SOP Valuation SOP -> Rs 2,923 Particulars

Value per share

Comments

2,373

12.5x of FY10E EV/EBITDA

IDPL ( BOT projects)

230

3x P/BV

L&T Infotech (Product engg., Energy/ Petchem, Mfg.)

218

12x FY10E EPS

L&T Finance (Financing construction equipments)

89

12x FY10E EPS

Value of 11.5% stake of Ultratech Ltd

46

based on ENAM TP of Rs946

Less Debt FY10

34

-

2,923

-

Core Business

Value per Share (Rs)

L&T IDPL (BOT Projects) Cost Roads

38.3

7.7

Stake (%) 100%

Ports

29.9

6.0

-

2.83

-

-

8.8

Kakinada Seaports Ltd

4.0

0.8

39%

0.31

25%

3.1

1.0

ISPL Haldia Ltd

1.3

0.3

22%

0.06

25%

3.1

0.2

Dhamra Port Company Ltd

Equity

L&T equity 7.67

IRR (%) 18%

on BV of equity 2.3

EV (Rsbn) 17.3

24.6

4.9

50%

2.46

25%

3.1

7.7

Bangalore International Airport Ltd

19.3

6.4

17%

1.1

40%

5.0

5.5

UIL

25.0

12.5

100%

12.5

25%

3.1

39.1

Other Real Estate - UIL

12.8

6.4

75%

4.8

25%

3.1

14.9

Total

-

-

-

28.9

-

-

85.6

L&T's Stake @ 78.4%

-

-

-

-

-

-

67.1

Value per share of L&T

-

-

-

-

-

-

230

Source: Company, ENAM Research

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DCF Valuation Rs bn

FY08E

FY09E

FY10E

FY11E

FY12E

FY13E

FY14E _ _

FY20E

34.5

44.3

55.9

74.2

84.7

93.1

108.5

239.4

9.8

12.6

14.0

18.6

21.2

23.3

27.1

59.9

24.8

31.7

41.9

55.7

63.6

69.8

81.4

179.6

less: Depriciation

4.6

6.1

7.1

8.5

9.7

10.9

12.1

23.1

Gross Cash Flow

29.3

37.8

49.0

64.2

73.3

80.7

93.5

202.7

8.8

10.8

15.8

-3.5

16.6

15.4

16.1

34.5

Operating Cash Flow

20.5

26.9

33.2

67.7

56.7

65.3

77.4

168.2

less: Capex

20.0

20.0

15.0

21.7

19.7

18.8

21.5

40.7

0.5

6.9

18.2

46.0

37.1

46.5

56.0

127.5

Key Assumptions (%) Cost of equity

13.0

Cost of debt (post tax)

5.6

WACC

9.3

Terminal growth rate of cash flow

0

Operating EBIT plus: Taxes NOPLAT

less: changes in operating WC

Free Cash Flow Terminal value PV FCF and terminal value

1,371 767

Net debt

22

Investments*

81

Equity value

870

Shares o/s (m) Equity value per share (Rs) CMP

292 2,981 2,432

Upside (%)

23

Source: Company, ENAM Research, * IDPL/Ultratech Cement

25

Company Financials Income statement Y/E March

(Rs mn) 2007

2008E

2009E

20010E

Net sales Other operating income Total income

203,315 3,494 206,809

263,100 4,193 267,293

337,815 5,031 342,846

417,080 6,037 423,118

Cost of goods sold Contribution (%) Advt/Sales/Distrn O/H

160,016

207,373

266,736

328,352

23

23

23

23

17,319

20,826

25,773

31,761

Operating Profit Other income

29,474 1,663

39,094 2,284

50,337 1,816

63,004 1,692

PBIDT Depreciation Interest Other pretax Pre-tax profit Tax provision (-) Minority Interests Associates Adjusted PAT E/o income / (Expense)

31,137 3,413 2,460 0 25,264 7,438 1,162 951 17,615 4,787

41,378 4,559 4,207 0 32,611 9,783 1,151 1,141 22,818 0

52,153 6,050 4,207 0 41,895 12,569 1,296 1,369 29,400 0

64,696 7,100 4,154 0 53,441 16,032 1,380 1,643 37,672 0

Reported PAT

22,401

22,818

29,400

37,672

Key ratios Y/E March

(%) 2007

2008E

2009E

20010E

Sales growth

24.0

29.4

28.4

23.5

OPM Oper. profit growth COGS / Net sales Overheads/Net sales Depreciation / G. block Effective interest rate

14.5 35.5 77.4 8.4 5.6 5.5

14.9 32.6 77.6 7.8 5.0 7.0

14.9 28.8 77.8 7.5 5.5 7.0

15.1 25.2 77.6 7.5 5.6 7.0

Net wkg.cap / Net sales Net sales / Gr block (x)

18.8 3.9

18.5 3.5

17.4 3.4

17.3 3.5

Incremental RoCE RoCE Debt / equity (x) Effective tax rate RoE Payout ratio (Div/NP)

18.3 25.8 0.8 29.4 28.1 18.8

34.9 25.4 0.6 30.0 26.9 21.1

39.3 27.6 0.5 30.0 27.5 19.3

48.9 29.6 0.4 30.0 27.8 18.8

EPS (Rs.) EPS Growth CEPS (Rs.) DPS (Rs.)

60.3 24.7 74.2 14.9

78.2 29.5 96.7 17.0

100.7 28.8 125.2 20.0

129.0 28.1 158.1 25.0

Source: Company, ENAM Research

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Company Financials Balance sheet Y/E March Total assets Gross block Net fixed assets CWIP Investments Wkg. cap. (excl cash) Cash / Bank balance Others/Def tax assets Capital employed Equity capital Reserves Borrowings Others

(Rs mn) 2007

2008E

2009E

20010E

140,619 61,146 39,568 14,692 0 44,386 37,685 4,288

159,772 90,838 64,700 5,000 0 53,214 32,570 4,288

184,803 110,838 78,650 5,000 0 64,060 32,805 4,288

215,274 125,838 86,549 5,000 0 79,910 39,527 4,288

140,619 567 74,656 60,100 5,297

159,772 567 93,809 60,100 5,297

184,803 567 118,840 60,100 5,297

215,274 567 150,811 58,600 5,297

Cash flow Y/E March

(Rs mn) 2007

2008E

2009E

20010E

Sources Cash profit (-) Dividends Retained earnings Issue of equity Borrowings Others

57,072 21,045 4,216 16,829 5,886 30,469 3,888

23,713 27,387 4,815 22,572 0 0 1,141

31,081 35,377 5,665 29,712 0 0 1,369

37,571 44,509 7,081 37,428 0 (1,500) 1,643

Applications Capital expenditure Investments Net current assets Change in cash

57,072 28,231 0 12,312 16,529

23,713 20,000 0 8,828 (5,115)

31,081 20,000 0 10,846 235

37,571 15,000 0 15,850 6,721

Source: Company, ENAM Research

27

CONFLICT OF INTEREST DISCLOSURE We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of August 9, 2007) 1. Analyst ownership of the stock 2. Firm ownership of the stock 3. Directors ownership of the stock 4. Investment Banking mandate 5. Broking relationship

Yes No No No No

We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.

This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors Enam Securities Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval Enam securities Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of ENAM Securities Private Limited. The views expressed are those of analyst and the Company may or may not subscribe to all the views expressed therein This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with ENAM Securities Private Limited.

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