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L&T v/s Hyundai E&C

Sep 18, 2008

A strong infrastructure setup is the core driving force for any economy to sustain growth over long periods of time. Infrastructure includes basic technical structures such as power, transportation and communication services amongst others. In any developing country, companies taking up infrastructure activities are slated to benefit from strong investments towards enhancing the same. India is a case in point. In this article, we will compare Indiaís largest engineering and construction (E&C) firm - L&T, with one of the worldís largest E&C firms Ė the Korean Hyundai Engineering and Construction (HEC).

A brief about the companies
L&T, Indiaís largest E&C entity, provides services in wide areas like infrastructure, oil and gas, power and process. The company has broadly segregated its business into three key segments - Engineering and Construction (E&C), Electrical & Electronics (E&E) and Machinery & Industrial Products (MIP). The companyís E&C division contributes nearly to 76% and 69% of the total standalone and consolidated revenues respectively (based on FY08 numbers).

Established in 1947, HEC is a Korea-based company involved in the civil engineering and construction businesses. It operates its business under four segments Ė

  1. Civil engineering Ė constructs roads, bridges, harbours, highways and railways,
  2. Construction Ė engaged in the housing, urban development and building construction businesses,
  3. Plant Ė provides nuclear power plants, power generation and industrial plants, and oil, gas and petrochemical plants,
  4. Electric and communication.

HEC is also involved in the real estate business. The company's headquarters are located in Seoul, South Korea.

For comparison purposes, we have compared L&Tís E&C divisionís parameters with those of HECís.

Order backlog and intake
HEC, being one of the largest E&C companies in the world, has an order backlog much bigger than that of L&T. To put things in perspective, at the end of calendar year 2007, the former had an order backlog of US$ 35 bn, while L&Tís order backlog (for fiscal ended March 2008) stood at almost US$ 13 bn.

In the last three years, L&T has had an average order backlog to sales of 2.3 times, while HECís ratio stood at 5.6, indicating a bigger backlog for the latter when compared to its annual sales. However, it should be noted that HEC has an average execution period of almost five years (an average order takes 5 years to complete), while L&Tís average execution period is lower at 2 to 3 years.

Coming to order intake, L&Tís order intake increased to US$ 9 bn in FY08 as compared to US$ 4.2 bn in FY06, translating into a strong 47% compounded annual growth rate (CAGR) over a two year period. On the other hand, HECís order intake was relatively large at US$ 12.5 bn in CY07 (compared to US$ 8.6 bn in CY05 Ė a CAGR of 21%).

Composition of order backlog
Source: Respective annual reports

We can see from the above chart that HEC has a large portion of its orders from the building works division, which primarily consists of construction of residential and commercial complexes along with urban development, followed by its civil, plant and electrical works division respectively.

L&T, which is present in similar businesses as HEC has a well diversified order backlog, with the major portion being infrastructure (36%), followed by oil and gas (23%), power (16%), process (14%) and others (11%).

During the period FY04 to FY08, L&Tís revenues grew at a CAGR of 25%, while HECís revenues grew at a slower rate of 9%. The main factor for the same can be attributable to the latterís large base. Large investments in the Indian infrastructure space and L&Tís leadership position therein have boosted the order intake for L&T, leading to robust growth in revenues.

During CY07, HEC earned 81% of its revenues from the domestic market (Korea), while the remaining came from the South East Asian (3%) and Middle East (16%) regions. On the other hand L&T earns nearly 75% of its consolidated revenues from the domestic space.

HEC, being an established player with over six decades of experience, has competition that is more global in nature. The companyís peer group includes major E&C companies from the US and European regions. These Ďdevelopedí regions, may be investing massive amount in infrastructure in absolute terms, but comparing it on an incremental basis, growth in investments in India are faster. As such, L&T having a leadership position in the domestic market has benefited and is slated to further benefit from the investments across the entire infrastructure sector in the years to come.

Operating parameters & ratios
Note - For comparison purpose, we have taken L&Tís standalone income and balance sheet figures

Over the past three years, L&Tís operating margins have improved significantly, from 7.2% in FY06 to 11.4% in FY08, averaging 9.6% during this period. On the other hand, HEC has recorded average margins of 8.6% during the same period. However, its margins have dropped to 6.8% in CY07 from 10.7% in CY05. Over the years, HECís margins have been dropping owing to its rising operating costs in overseas projects.

Parameters CY05 CY06 CY07 FY06 FY07 FY08
ROE 24.8% 21.8% 12.1% 21.9% 24.4% 22.8%
ROCE 19.3% 13.2% 14.2% 23.8% 26.8% 25.0%
ROA 6.4% 7.0% 4.2% 7.7% 8.1% 8.0%
P/E* 21.5 31.7
*EPS for HEC is taken as of December 2007.

Comparatively, L&T is currently going through a strong growth phase and is expected to do so in the future. This is reflected in the two companiesí comparative valuations. L&T is currently trading at a P/E multiple of 31.7 its FY08 consolidated earnings. Compared to this, HECís P/E based on its CY07 earnings is 21.5 times.

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