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L&T: Analyst Meet Notes

May 31, 2001

Larsen & Toubro, which has announced a 7% decline in profits for FY01, has stated that it is ‘guardedly optimistic’ about the future. The company at its analyst meet stated that its cement restructuring plans were on track. What follows are some notes from the meet:

  • For the first time in two years the company says that orders are finally coming through. Its EPC order backlog is over Rs 90 bn. A look at the major contracts awarded last year reveals a number of road projects (good for its cement division). The company has taken successful steps to create a toehold for itself in the international markets. L&T refers to this as multinationalisation.
  • The cement business performed very well in 4QFY01. Going forward the contributors to growth will be reconstruction in Gujarat, concretization of highways and demand from the housing sector. Another area of opportunity is exports (the company exported over 2 million tonnes in FY01). Cement prices are anticipated to hold up in the medium term.

  • Performance of other divisions was not encouraging.

  • Declining margins is the norm (incl. in EPC) due to competition form Korean EPC companies. Ditto for its electrical business group (EBG) where the likes of GE are giving it a tough time. However, with cement and EPC accounting for over 87% of revenues, the impact of these smaller divisions is limited. In EPC however the decline in margins was well anticipated.

    Operating Margin (%)
    Product FY00 FY01
    EPC 13.1 11.7
    Cement 12.5 17.1
    EBG 21.1 17.8
    Others 12.7 5.3
      10.0 10.1
  • Cement restructuring is on in full swing. The company, rightly so, is cautious in dealing with bidders trying to ensure that L&T shareholders get the best deal. Their rationale is legitimate. Expect something within 8 weeks. L&T is now open to the idea of giving the strategic partner an equal stake of 37.5% in the cement subsidiary.

  • Its 100% infotech subsidiary too is doing well (PAT of Rs 360 m in FY01, a growth of 140%). Strategy is in place and management is serious to develop it as a business. No body shopping. The company expects its experience in various industries will make it a preferred choice for software contracts.

  • The management now exudes confidence (though they are guardedly optimistic) unlike even six months back. They are also implementing a leadership development program.

Using a Market Capitalisation to sales of 0.8 (comparable to BHEL) and 2.0 (comparable to Gujarat Ambuja) for its EPC and cement businesses respectively, L&T’s value comes out to be Rs 330 per share i.e. a premium of 32% to the current price. At its current price of Rs 253, it trades at a P/e multiple of 20x (based on FY01 earnings).

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