India Research

Stock Data

Larsen & Toubro

No. of shares : 284mn
Market cap : Rs 691bn
52 week high/low : Rs 2735/ Rs 1136
Avg. daily vol. (6mth) : 1mn shares
Bloomberg code : LT IN
Reuters code : LART.BO
Rs 2,432
Shareholding (%) Jun-07 QoQ chg
Relative to Sector: Outperformer Target Price: Rs 2,923
Promoters : 0.0 0.0
FIIs : 17.8 (0.4) Potential Upside: 20%
MFs / UTI : 15.8 0.8
Banks / FIs : 22.4 0.2
Others : 43.9 (0.5)
Relative Performance
300

200

100
From cyclical to secular growth
0
Jun-06 Dec-06 Jun-07
Sensex L&T

Source: ENAM Research, Bloomberg

Financial summary
Sales PAT Consensus EPS Change P/E RoE RoCE EV/EBITDA DPS
Y/E March
(Rs mn) (Rs mn) EPS* (Rs.) (Rs.) (YoY %) (x) (%) (%) (x) (Rs)
2007 206,809 17,615 - 60.3 25 26.8 28.1 25.8 16.5 14.9
2008E 267,293 22,818 78.1 78.2 30 31.1 26.9 25.4 18.5 17.0
2009E 342,846 29,400 102.1 100.7 29 24.2 27.5 27.6 14.4 20.0
20010E 423,118 37,672 134.8 129.0 28 18.8 27.8 29.6 11.4 25.0
Source: *Consensus broker estimates, Company, ENAM estimates

Bhavin Vithlani Shreya Doshi Associate: Akshen Thakkar

bhavin@enam.com (+91 22 6754 7634) shreya@enam.com (+91 22 6754 7646) akshen.thakkar@enam.com August 11, 2007
1
Table of contents
Slide No.

 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 2007 2010E 2012E
„ L&T’s initiatives in high RoI defense, power plant ROI
equipments, nuclear, shipbuilding and railway businesses New businesses
3% 5% 15%
are key earnings drivers beyond FY10 (ROI –30%)

 Existing businesses have a strong foothold IT 8% 10% 11%

„ Order flows in infrastructure business to accelerate– (ROI – 30%)
Outlay of USD 350bn over 2007-2012E i.e. 24% CAGR
„ Industrial capex of USD 200bn over FY07-12 i.e. 25% Manufacturing 24% 23% 20%
CAGR, mostly greenfield (ROI-25%)
„ Petro dollars driving GCC’s USD 1.4trn capex
E&C
66% 62% 54%
(ROI – 18%)
 Margins to improve by 110bps over FY07-10E
„ Improving quality of order backlog
„ Ability to optimally allocate key resources New businesses to cover E&C cyclicality
„ Favorable business environment
L&T’s Business trajectory
 RoI to expand over the long term
„ Rising contribution from manufacturing, I.T and new
businesses

Growth
E&C
 L&T IDPL and L&T Infotech– potential value Business
unlocking opportunities Cycle IT, defense and
power – secular businesses

 At CMP (Rs 2,432), adj. for IDPL and

investments, the core business trades at 12.9x
2007 2012
FY09E and 10.3x FY10E EV/EBITDA Time
Source: Company, ENAM Research
3
SOP Valuation
SOP -> Rs2,923
Particulars Value per share Comments
Core Business 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 -

Value per Share (Rs) 2,923 -

L&T IDPL (BOT Projects)

Cost Equity Stake L&T IRR on BV of EV
(%) equity (%) equity (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3
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 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

4
Building a robust business model
FY07-12E Sales 2012E
2007 2010 2012 ROI
CAGR (%) ( Rs bn)

5 New biz. * 3% 5% 15% 30% 73% 94

3% 5% 15%

IT/ Fin 8% 10% 11%

11% 30% 36% 72
8% 10%

Mfg. 24% 23% 20% 25% 20% 124

24% 23% 20%

E&C 66%
66% 62%
62% 54%
54% 18% 20% 340

Total 25% 631

* 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
Defense Shipbuilding Nuclear power Railways
equipments

DOFA estimates India’s 20GW of supercritical World shipbuilding order Expect 40GW of Nuclear Indian Railways to
•

defense market to reach projects to be awarded book has been growing projects to be awarded spend USD 68bn for
USD 30bn by 2012 from over the next five years at 29% over 2003-06. by 2007-2012 modernization,
USD 10bn in 2007 Current global market expansion, freight
estimated at USD 20bn corridor, etc.

(Rs bn) 2007 2012E (Rs bn) 2007 2012E (Rs bn) 2007 2012E (Rs bn) 2007 2012E (Rs bn) 2007 2012E
Revenue 6 42 Revenue NA 27 Revenue NA 25 Revenue NA NA Revenue NA NA
EBITDA 1.5 8.4 EBITDA NA 4.0 EBITDA NA 6.2 EBITDA NA NA EBITDA NA NA

Key drivers for 2010-2012 Drivers beyond 2012

Ship
building Defense
27% 44%
Existing
New
85%
15%

Power
Source: Company, ENAM Research
29%
7
 45%

Defense
Industry size Industry growth L&T FY08E L&T market L&T growth Estimated
2007 ( Rs bn) (FY07-12E) Sales (Rs bn) share by 2012 YoY ROI

45 34% 8.1 3% 47% 40%

Defense: Sales and EBITDA trends

Scope of work Drivers
50
(Rs mn)
„ Manufacturing missile guiding „ India’s defense mkt. stands to USD 40
systems, rocket launchers, etc. 21.7bn in FY07. 30
„ Weapon System & Sensors „ DOFA estimates India’s defense 20
„ Radar Platforms, Sonar Systems market at USD 100bn and an offset 10
& Electronic Warfare Systems opportunity of USD10bn over next
0
„ Developing products with DRDO 5 years
FY07 FY10E FY12E
Sales EBITDA
 L&T’s strategy is to specifically target the imported equipments
„ 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 Industry growth L&T FY08E L&T market L&T growth Estimated
2007 ( Rs bn) (FY07-12E) sales (Rs bn) share by 2012 YoY ROI

230 15% NA 20% NA 30%

Scope of work Drivers PPE: Business Economics

Particulars (Rs mn)
„ Captive & Cogen power plants „ As per XIth plan, 68GW of Capex for fixed assets 16,000
„ Renovation and modernization generation capacity is to be Peak revenues 56,000
(R&M) commissioned by 2012 EBIT @ sustainable margin of 15% 8,400
„ Operation and maintenance „ Of the above, 47GW of thermal PAT @ sustainable PATM of 10% 5,600
(O&M) projects are yet to be awarded. Of
Wkg cap requirement @ 20% of sales 11,200
„ Balance of plant and EPC these ~50% of these are based on
Assumed asset turns 3.5
„ Foraying into manufacturing super critical technology
Sustainable ROI (%) 31
boilers & turbines
Sustainable ROE at D:E of 1:1 (%) 41
Source: Company, ENAM Research

 L&T is setting up a 3,000MW super critical boilers & turbines manufacturing facility
„ 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
Industry growth L&T FY08E L&T market L&T growth Estimated
size
(FY07-12E) Sales (Rs bn) share by 2012 YoY ROI
2007 ( Rs bn)

1600 30% 2 < 1% 88% 25%

Business Economics
Scope of work Drivers
Particulars (Case without Subsidies) (Rs mn)
Capex for fixed assets 20,000
„ LNG carriers and VLCC „ Navy spend on ships currently at Rs
Peak revenues 50,000
„ Submarines and Frigates for 55bn
Indian Navy „ Commercial shipbuilding to grow @ EBIT @ sustainable margin of 20% 10,000
„ Offshore process platforms 15% to USD 22bn by 2020 PAT @ sustainable PATM of 13% 6,500
„ USD 15bn E&P capex for KG basin Wkg cap requirement @ 35% of sales 17,500
Assumed asset turns 2.5
Sustainable ROI 27
Sustainable ROE at D:E of 1:1 35
Source: Company, ENAM Research

 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 Industry order
L&T FY08E L&T market L&T growth Estimated
inflows inflows
Sales (Rs bn) share by 2012 YoY ROI
2007 (MW) FY07-12E (MW)

500 12,800* NA 10% NA 30%

Business economics
Scope of work Drivers
Particulars (Rs mn)
„ Construction of reactor core, civil „ INDO-US nuclear treaty to be a big Capex for fixed assets 10,000
construction and balance of plant positive for the sector; NPCIL to Peak revenues 40,000
„ Technological capability in Light double its target to 40GW by 2020. EBIT @ sustainable margin of 15% 6,000
water (LWR) , Pressurized heavy „ L&T to be a preferred contractor, PAT @ sustainable PATM of 9% 3,600
water (PHWR) , Fast breeder considering its previous experience. Wkg cap requirement @ 20% of sales 8,000
(FBR) Assumed asset turns 4.0
Sustainable ROI 33
Source: Company, ENAM Research, * As per NPCIL plan of 20GW addition by 2020 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

„ 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 Opportunity for private players Railway: Plan outlay
300
(Rs bn) 300
„ Railway electrification „ Development of dedicated
„ Track laying and bridge freight corridors 250
construction „ Upgradation of signaling and 190
200
„ Traffic facilities telecommunications systems
„ Rolling stock „ Augmentation of capacity for 136 141
150
„ Signaling and telecom works Rolling Stock manufacturing 110
„ Metro rails „ Metro rail for cities like Mumbai, 100
Bangalore and Hyderabad.
50
FY04 FY05 FY06 FY07R FY08E
Source: Company, ENAM Research 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…
Investor Class Capex and Growth Trends Drivers Dampeners

Rs bn FY03-FY07 FY08-FY12E CAGR (%)

Industrial Capex 1,584 4,914 25% ƒ Economic
Steel 141 1,000 48% ƒ High commodity
Slowdown
Aluminum 20 205 59% prices
Cement 60 400 46% ƒ Rising
Private Sector ƒ High utilization
Paper 56 148 21% interest rates
Dominated levels
ƒ Increasing
Fertilisers 40 93 18% ƒ Available natural
Textiles 26 60 18% lead time for
Petrochemicals 20 200 58% resources
equipments
Oil & gas 1,040 2,498 19%
Automobiles 181 310 11%

Rs bn FY03-FY07 FY08-FY12E CAGR (%)

Infrastructure 3,511 10,500 24% ƒ Rising
Roads 1,225 3,687 25% ƒ Movement of goods
Public – Private interest rates
Airports 41 408 58% – Urbanization/
Partnership Globalization
ƒ Traffic
Railways 797 2,714 28%
growth
Ports 337 870 24%
Real Estate 1,111 2,821 20%

Rs bn FY03-FY07 FY08-FY12E CAGR (%)

Public Sector Power 2,765 9,637 28% ƒ Power shortage ƒ Collection risk
Dominated Power Generation 1,798 5,367 24%
Power T & D 967 4,270 35%
Source: Crisinfac, ENAM Research

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

14
… further aided by the boom in GCC & China
 Robust outlook for GCC nations Key International Operations
„ National income avg. 19% growth in 2002-06
L&T International FZE
„ GCC governments added almost USD 500bn
to net foreign assets over 2002-06

 USD 1.25 trillion in planned public and Middle East China

private projects over 2007-12E
„ USD 330bn in oil & gas and power sectors -
Hydrocarbons & Coal Gasification
L&T’s forte „ „
Infrastructure „ Electrical std products
„ Saudi Arabia, Oman, „ Sourcing & Global
 L&T has expanded capacities in UAE, Qatar, Kuwait Manufacturing
anticipation of growth
„ Modular fabrication facility in Oman for Petro dollars are fuelling infra spend in GCC
servicing offshore, refining, petchem and 800
(USD bn)
chemical sectors 600
„ Electrical switchgear & switchboard facility in
China for servicing demand from the housing 400

segment 200

0
 L&T has now moved up the value chain and

Industry
Oil&Gas
Construction

Petchem

Water&Waste
Power
is a Tier 2 player for the Middle East

 Expect revenues to double to USD 2bn by

2010
Underway Advanced planning stage Early planning stage

Source: Company, NBK Economic Research, ENAM Research

15
Changing sector dynamics to favor L&T
Infrastructure
Infrastructure Hydrocarbons
Hydrocarbons Industrial
Industrial

„ Avg. order size for ~4.5K kms of
BOT roads to increase to
~300kms from ~100kms earlier
Changing sector „ Privatization of Ports and
dynamics … Airports
„ 30GW of 12th plan Hydro
projects to be ordered in 11th
plan
„ 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
„ India Inc on greenfield addition
spree:
„ Steel: 25 MMTPA over 2007-12
„ Aluminum: 1 MMTPA over 2007-
12
„ Cement: 100MMTPA over 2007-
12

„ Rising order size to reduce
competitive intensity and
improve margin profile
….to benefit L&T „ Increased net worth norms
„ Oil & gas requires complex engg.
skills and very few Indian players
such as L&T have the pre-
qualification and the balance
sheet to handle large projects
„ Corporate clients are
incrementally favoring large
organized players like L&T for
timely delivery and quality
control

Est. revenues
by 2010 Rs 152bn Rs 142bn Rs 69bn

Share of revenues by 2010 36% 34% 17%

Corporate capex is adequate to meet demand growth

16
Manufacturing: Key profitability contributor
Electricals
Electricals &
& Machinery
Machinery &&
Heavy
Heavy Engineering
Engineering Electronics
Electronics Industrial Products
Industrial Products

„ Refinery and fertilizer plant
modernization in India
„ Shipbuilding and nuclear reactors
„ Refineries, petrochemical &
Sector opportunity
fertilizer plants in Middle East
„ Coal gasification projects in
China, South America & Middle
East
„ 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
„ Domestic construction boom
„ Up-tick in mining activities
„ Large capex in user industries
like cement, coal, iron ore, wind
energy, paper

„ Capacity augmentation at „ Electrical products facility in „ Adding distributorship with

Mumbai & Coimbatore plants
„ Focusing on high margin complex
Aviation, Aerospace & Defense
L&T’s initiatives
sectors.
„ Export thrust
China for global sourcing
„ New facility in Coimbatore for
electrical systems & products,
and petrol dispensing pumps &
systems
Komatsu mining eqip., Scania
Multiaxle trucks
„ JV in China for valves
manufacturing
„ Augmenting production/
servicing capacity

Est. revenues
by 2010 Rs 29bn Rs 40bn 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 Product Others
engineering 1%
services, embedded systems and ADM services Manufacturing
services 32%
„ Strong domain expertise in product engineering services, 17%
manufacturing and energy/ petrochem

 A fast growing USD 1bn business (FY10) with BFSI

strong operating levers 10%
Energy &
„ Engineering and embedded systems will lead the next
Petchem
offshore wave Insurance
17%
23%
„ Scalable: Expected employee base of 21,000+ in FY10E
This compares favorably against Tech Mahindra’s Net Profit: Sensitivity to growth and margins
Q1FY08 employee base of 21,000+ (USD mn) Sales CAGR (%)
35 40 45 50 55
11 81 90 100 111 122
 Margin increase to be greater than peers

NPM (%)
13 95 106 118 131 144
„ Higher operating levers as compared to peers. Currently 15 110 123 136 151 166
has offshore revenue share of 43% and blended 17 125 139 154 171 189
19 139 155 173 191 211
utilization rates of 63%
„ Expect utilization to improve from current 63% to 73%+
Value/share: Sensitivity to exchange rate and P/E
„ Increased offshoring - FY07 onsite: offshore mix was at (Rs/ share) INR/USD
57:43 292 35 37 39 41 43
„ Expected reduction of leverage from the present levels 8 77 91 107 124 144

P/E (x)
of 1:1. This will improve net realizations for investors 10 114 135 158 184 212
12 158 186 218 254 294
14 209 247 289 336 389
16 267 315 369 429 497
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 Equity Stake L&T IRR on BV of EV
(%) equity (%) equity (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3
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 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 Improving revenue mix
500
„ Infrastructure and hydrocarbon investments to drive (Rs bn)
29% CAGR in construction revenues through FY07-10E 400
„ Manufacturing biz. i.e. Electrical, MIP and Heavy Engg. 300
to sustain 28% CAGR over FY07-10E
200
„ InfoTech and Finance subs to continue it growth trend
100
 Margin to expand 60bps over FY07-10E 0
„ Favorable shift in order book mix; low margin roads
FY06 FY07 FY08E FY09E FY10E
down to 10% in FY07 from 20% in FY06, while high
Construction Manufacturing Infotech
margin airports have increased from 5% in FY06 to Finance Others
15% in FY07
„ Ability to improve margins by optimally allocating FCF/ ROI trend
fungible talent and reduction in number of sites 22,000 (Rs mn) 30
(%)
28
11,000
 Free cash flow generation beyond FY09 26
„ Major capex required of USD 1.5bn over FY08-10 to 0 24
achieve targeted growth of 30% 5-year CAGR 22
„ Funding capex through excess cash on books and (11,000)
20
internal accruals
(22,000) 18
 RoI expand over longer term driven by rising 2006 2007 2008 2009 2010

share of high margins new business and IT FCF (LHS) RoCE (RHS)

Source: Company, ENAM Research

21
Succession planning
Corporate A
AMM Naik,
Naik, CMD
CMD
governance Retaining talent
through…
Strategic BOD
BOD
supervision
 ESOPs
Non executive 7 Exec. Dir/ SBU
Directors Heads  Merit based
compensation
Financial
structure
Electricals & IT & Technology
Construction E & C Projects Heavy Engineering MIP Services,
Electronics Services
Finance & HR
 Restructuring
R.
R. N.
N. Mukhija
KK VV Rangaswami
Rangaswami K.
K. Venkatraman
Venkatraman M.
M. V.
V. Kotwal
Kotwal Mukhija J.J. P.
P. Nayak
Nayak V.K.
V.K. Magapu
Magapu Y.M.
Y.M. Deostahlee
Deostahlee
of mgmt.
cadre
Leadership development

Â
 Each
Each SBU
SBU head
head currently
currently grooming
grooming aa team
team of
of 55 people
people Attracting talent by …
„
„ ~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  Shortening the
leaders will graduate to the board level as an CEO of each SBUs
learning curve
Â
 Cascading
Cascading the
the program
program to
to various
various levels
levels
 ‘Campus to
„
„ 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
corporate program’
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  ‘Anytime learning
knowledge through Advanced Management
knowledge through Advanced Management Programs Programs 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
Core Business 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 -

Value per Share (Rs) 2,923 -

L&T IDPL (BOT Projects)

Cost Equity Stake L&T IRR on BV of EV
(%) equity (%) equity (Rsbn)
Roads 38.3 7.7 100% 7.67 18% 2.3 17.3
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 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

24
DCF Valuation
Rs bn FY08E FY09E FY10E FY11E FY12E FY13E FY14E _ _ FY20E
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 34.5 44.3 55.9 74.2 84.7 93.1 108.5 239.4
plus: Taxes 9.8 12.6 14.0 18.6 21.2 23.3 27.1 59.9
NOPLAT 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
less: changes in operating WC 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
Free Cash Flow 0.5 6.9 18.2 46.0 37.1 46.5 56.0 127.5
Terminal value 1,371

PV FCF and terminal value 767

Net debt 22
Investments* 81
Equity value 870
Shares o/s (m) 292
Equity value per share (Rs) 2,981
CMP 2,432
Upside (%) 23
Source: Company, ENAM Research, * IDPL/Ultratech Cement

25
Company Financials
Income statement (Rs mn) Key ratios (%)

Y/E March 2007 2008E 2009E 20010E Y/E March 2007 2008E 2009E 20010E

Net sales 203,315 263,100 337,815 417,080 Sales growth 24.0 29.4 28.4 23.5
Other operating income 3,494 4,193 5,031 6,037
Total income 206,809 267,293 342,846 423,118 OPM 14.5 14.9 14.9 15.1
Oper. profit growth 35.5 32.6 28.8 25.2
Cost of goods sold 160,016 207,373 266,736 328,352 COGS / Net sales 77.4 77.6 77.8 77.6
Contribution (%) 23 23 23 23 Overheads/Net sales 8.4 7.8 7.5 7.5
Advt/Sales/Distrn O/H 17,319 20,826 25,773 31,761 Depreciation / G. block 5.6 5.0 5.5 5.6
Effective interest rate 5.5 7.0 7.0 7.0
Operating Profit 29,474 39,094 50,337 63,004
Other income 1,663 2,284 1,816 1,692 Net wkg.cap / Net sales 18.8 18.5 17.4 17.3
Net sales / Gr block (x) 3.9 3.5 3.4 3.5
PBIDT 31,137 41,378 52,153 64,696
Depreciation 3,413 4,559 6,050 7,100 Incremental RoCE 18.3 34.9 39.3 48.9
Interest 2,460 4,207 4,207 4,154 RoCE 25.8 25.4 27.6 29.6
Other pretax 0 0 0 0 Debt / equity (x) 0.8 0.6 0.5 0.4
Pre-tax profit 25,264 32,611 41,895 53,441 Effective tax rate 29.4 30.0 30.0 30.0
Tax provision 7,438 9,783 12,569 16,032 RoE 28.1 26.9 27.5 27.8
(-) Minority Interests 1,162 1,151 1,296 1,380 Payout ratio (Div/NP) 18.8 21.1 19.3 18.8
Associates 951 1,141 1,369 1,643
Adjusted PAT 17,615 22,818 29,400 37,672 EPS (Rs.) 60.3 78.2 100.7 129.0
E/o income / (Expense) 4,787 0 0 0 EPS Growth 24.7 29.5 28.8 28.1
CEPS (Rs.) 74.2 96.7 125.2 158.1
Reported PAT 22,401 22,818 29,400 37,672 DPS (Rs.) 14.9 17.0 20.0 25.0

Source: Company, ENAM Research

26
Company Financials
Balance sheet (Rs mn) Cash flow (Rs mn)

Y/E March 2007 2008E 2009E 20010E Y/E March 2007 2008E 2009E 20010E

Total assets 140,619 159,772 184,803 215,274 Sources 57,072 23,713 31,081 37,571
Gross block 61,146 90,838 110,838 125,838 Cash profit 21,045 27,387 35,377 44,509
Net fixed assets 39,568 64,700 78,650 86,549 (-) Dividends 4,216 4,815 5,665 7,081
CWIP 14,692 5,000 5,000 5,000 Retained earnings 16,829 22,572 29,712 37,428
Investments 0 0 0 0 Issue of equity 5,886 0 0 0
Wkg. cap. (excl cash) 44,386 53,214 64,060 79,910 Borrowings 30,469 0 0 (1,500)
Cash / Bank balance 37,685 32,570 32,805 39,527 Others 3,888 1,141 1,369 1,643
Others/Def tax assets 4,288 4,288 4,288 4,288
Applications 57,072 23,713 31,081 37,571
Capital employed 140,619 159,772 184,803 215,274 Capital expenditure 28,231 20,000 20,000 15,000
Equity capital 567 567 567 567 Investments 0 0 0 0
Reserves 74,656 93,809 118,840 150,811 Net current assets 12,312 8,828 10,846 15,850
Borrowings 60,100 60,100 60,100 58,600 Change in cash 16,529 (5,115) 235 6,721
Others 5,297 5,297 5,297 5,297

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 Yes
2. Firm ownership of the stock No
3. Directors ownership of the stock No
4. Investment Banking mandate No
5. Broking relationship 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.

28