Recommendation: Buy
CMP = Rs 3,536
Price target: Rs 4,428
Key points:
- L&T, being the largest engineering and construction company in
- The contribution of international revenues has grown from 4% to 17.5% in the last five years and is expected to reach 25% by FY2010. Gulf Corporation Council nations offer immense business opportunity ($1.25 trillion) over the next six years, which augurs well for company like L&T.
- I believe there lies an immense opportunity in the new verticals in which the company is entering namely ship building, defense, railways, thermal and nuclear power. Given the company's excellent track record, I am confident of its success in these initiatives and am also encouraged by higher returns on investments in these segments.
- I believe there is a scope for further improvement in the margins on the back of rising operational efficiencies, larger ticket-size and more complex nature of orders, better raw material sourcing and integration, and higher contribution of its new businesses that carry higher margins.
- Some of the subsidiaries of L&T, particularly L&T Infotech, L&T Finance and LT FZE have reached critical size and importance, making L&T a true conglomerate and a diversified play.
- Sound execution track record, bulging order book, and strong performance of subsidiaries reinforces our faith in L&T. I value the core business of L&T at 28x FY2010E earnings, or Rs 3,403 per share, while the subsidiaries at Rs 1,025 per share of L&T. At the current market price of Rs 3,536, the stock is trading at 21.9x its FY2010E consolidated earnings.
- I recommend a strong Buy on the stock with the price target of Rs 4,428 over next 6 months.
