Buy Larsen and Toubro; target of Rs 1523: ICICIdirect.com

“Larsen and Toubro’s Urban Infra orders for Commercial and residential real estate, hospitals, luxury hotels and Education sector are expected offers strong pipeline. The minimum ticket sizes of these orders are Rs 200 crore, while the average size being Rs 300-400 crore. As per the management, this segment can alone contribute to 25% of the order inflows for FY13E. Coupled with this, T&D segments (domestic and international orders) have the potential to offer Rs10000-15000 crore inflow opportunity in FY13E.”

“A key positive development has been addressing investor concern with respect to investments in capital guzzling BOT projects. The management has decided to defocus on BOT projects rather monetise assets under development via IPO/stake sale to P/E firms in individual subsidiaries/SPVs to maximize shareholder value. As of Q1FY13, investments and loans to subsidiaries account for 20%/54%/38% of parent’s balance sheet, net worth & capital employed, respectively. This makes us believe RoE’s will trough at current levels and will only inch up.”

“There is a consensus on the quantum of YoY PAT growth for L&T in FY13E (10%). We believe the Street is divided on ascribing a P/E multiple to the base business (range of 10-16x on one year forward multiple). We remain relatively upbeat and are on the upper range of the consensus band given L&T poses best earnings visibility (16% revenue CAGR over FY12-14E), solid balance sheet and intention to increase base RoE’s via monetization of key subsidiaries. Maintain buy with fair value of Rs 1523,” says ICICIdirect.com research report.

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