Larsen & Toubro - Key RoE triggers - Doubling of market share, focus on asset turn - Motilal Oswal

- L&T's consolidated RoE has deteriorated significantly from 31% in FY07 to 17% in FY12. Correcting the capital structure and improving RoEs are important objectives.

- However, 'RoE improvement' is easier said than done, especially for a conglomerate like L&T. It requires serious commitment and disciplined action, more so in a period when the macro environment continues to be challenging.

- We believe that the roadmap towards meaningful improvement in RoE would be led by the following:

1. The new manufacturing business coupled with exposure to several geographies/ segments would provide impetus to further double its market share, a key trigger for RoE improvement.

2. Investments in subsidiaries at 48% of IC, future strategy will entail a mixed approach:
i) Manufacturing businesses: Attempt will be to defend its investments, given the long-term growth potential, sacrificing near-term return ratios
ii) Infrastructure development: Attempt will be to monetize the assets and churn the portfolio
iii) Service businesses (IT, Finance, etc): Focus will be to build scale

- VALUATION & VIEW: We expect L&T to report standalone revenue CAGR of 15% and PAT CAGR of 10% over FY12-14; consolidated PAT CAGR would be 8%. We maintain Buy with a revised SOTP-based target price of INR1,696 (up from INR1,670). We have valued LT standalone at 15x FY14EPS and subsidiaries at INR465/share.

Source : Equity Bulls

Keywords