The Hindu Business Line : Larsen & Toubro: BUY

With a diversified order book, proven execution skills and a strong balance sheet, Larsen & Toubro (L&T), India’s largest engineering conglomerate, is better-positioned to weather risks such as firm commodity prices and a possible slowdown in industrial production. The recent announcement of a one-off loss in commodity hedging is unlikely to have any lasting impact on the company’s long-term growth prospects. Investors can consider taking advantage of recent market volatility to add the stock to their portfolio.

At the current market price, the stock trades at 27 times estimated consolidated earnings for FY09. Invest with at least a five-year perspective to allow the company’s entry into high-potential segments such as shipyards and power equipment to flow through to earnings.

L&T’s order book of about Rs 50,000 crore spans sectors such as hydrocarbons, urban infrastructure and power. Presence in similar segments across geographies is also an added advantage.

Any slowdown witnessed in the domestic markets can be offset by the massive spending currently being witnessed in the West Asian region, where L&T has ramped up activity in the oil/gas and infrastructure space. L&T has been consistently improving its operating profit margins, even as most of its peers feel the heat from spiralling steel prices. A better product mix, with focus on high margin sectors such as oil and gas and process industries such as minerals, metals and refineries has aided the company in managing rising costs.

The changing product mix also suggests that as low-margin legacy orders near completion, the high margin projects bagged more recently would aid better profitability. L&T’s entry into the highly lucrative super-critical boilers and turbines segment through a joint venture with Mitsubishi appears well timed, as there are no strong domestic contenders other than BHEL, at present. This business, together with shipbuilding, is likely to attain critical mass over the next 3 years and drive revenues.

As exports form close to 20 per cent of L&T’s revenues, losses from any adverse currency fluctuations remain a risk. The company appears to be treading cautiously on forex transactions and has expressed its keenness to convert its dollar-denominated loans into rupees to avoid currency risk.

Vidya Bala

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