Pl. give your analysis and advice.

Kiran Ji:

AT the present level the stock appears having discounted its near term developments but if you are building a portfolio for 1- 2 years then   L& T should form a part of your portfolio.

Now on the bonus issue:

I have never given importance to a bonus issue. The effects of a bonus are:

1) Reduces the share price but also reduces the EPS but the PE remains same.

2) Number of shares increases but their price falls but the wealth remains unchanged and so does the market cap.

3)) RoE and RoCE remains same after a bonus or a split.

You would argue that if all seems so apparent why is it that a company that issues bonus sees its share price going up in the next 12 -18 months

1)      Bonus is more of a statement of confidence. Companies that issue bonus shares indicate to the public that their results in the  immediate future is expected to be very good.

2)      After a bonus retail investors buys the stock as they get interested in the stock (since it appears cheaper) but this is a mirage.

Over the next few years Corporate India is expected to spend Rs 700,000 crores in capex. This coupled with the Infrastructure BOOM would help the leader of this space L&T to deliver a CAGR of more then 25% for the next 3-4 years.

The domestic petroleum sector is expected to an investment of over Rs 150,000 crores – The Company expects this segment to be a key growth engine for the company over the next few years.

The strong order backlog coupled with the sustained flow of orders in the engineering and construction segment should logically increase the operating margins – When a company is booked with orders it could choose and take such projects where margins are higher.

L&T has been significantly present in the power sector with the boast to this space L&T should be further benefited.

The problems that the company foresees is “attrition” skilled man power are always in demand and

The key challenge in a skilled manpower project business is managing HR. This could see some poaching but smarter people generally like to work with larger stable companies unless they see a niche somewhere else.

The stock does trade at premium valuations to the sector as a whole but considering the long term visibility this premium could well, be sustained.

The stock looks fairly priced from the near term angle.

Heard that L&T is ready with its startegy to put up nuclear plants and is waiting for the formal approval in the Indo-US treaty for the same.One of the best large cap stocks in India!

Thanks Basantji. L&T with its expertise in nuclear plant building can have a fairly good opportunities in near future.

India is one of the largest importers of arms and the margins in this business can be very High.

I think one can expect good margins  in the weapons sector since this is limited only to niche players... lets see how it pans out.....

http://www.bseindia.com/qresann/news.asp?newsid=%7b1CF582BD-BD30-407B-8757-9E93D3E25E67%7d - Larsen & Toubro Ltd (L&T) has informed BSE that the Company and its international consortium partners of Paul Wurth Italia have bagged an EPC (Engineer- Procure-Construct) package, value over Rs 1400 crores, for the expansion of Vizag Steel Plant of Rashtriya Ispat Nigam Ltd (RINL). This is the largest single-value EPC order by the client and was bagged against stiff international competition from Chinese, Korean and Russian Firms.

In line with the National Steel Policy envisaging production of 110 million tonnes per annum (MTPA) of steel in the country by the year 2019-20, RINL has embarked upon a capacity expansion at Vizag. It had invited bids for installation of a new third blast furnace to double its capacity to 6.5 MTPA of hot metal from the present level of 3.2 MTPA.

L&T will construct this blast furnace - a state-of-the-art 3800 cu.m. unit with a capacity of 2.5 million tonnes of hot metal per year. This is the second biggest blat furnace in India. L&T's Construction Division, ECC, will execute this contact in consortium with Paul Wurth Italia within a stringent time-frame of 30 months.

L&T's scope of work includes complete detailed engineering apart from certain areas of basic engineering based on the process-engineering being supplied by Paul Wurth. The complete indigenous manufacturing and supply of equipment lies in the scope of L&T. Apart from this, complete site services including the civil and structural works and erection of equipment will be undertaken by L&T, with specialized supervision being provided by Paul Wurth. L&T's contract-value in this project is around Rs 810 crores.

Paul Wurth Italia (the merged entity of Paul Wurth of Luxembourg and SMS Demag of Italy) is the world-leader in iron-making technology through the blast furnace route. By introducing the latest technology in iron making. L&T will once again demonstrate its commitment to design and execute large sized blast furnaces in the Indian steel industry.

This consortium is already executing a similar sized blast furnace order for Tata Steel in Jamshedpur where the project is scheduled to be commissioned by early next year.

As a shareholder of L&T, I hope the company have got their valuations right. An EPC contract is a double edged sword, and can result in major valuation surprises(sometimes postive and sometimes negative) for both the client and the Engineering Contractor. Without taking away anything from L&T evaulation capabilites ,over the years, ,  reputed Engineering Firms have started regretting to quote for either LSTK or EPC contracts because of this very reason e.g H & G , Toyo and Lurgi to name a few. The CPF form of contracting is more preferred as there is a lot of clarity with regards to scope of work, pricing, back to back guarantees and offers from sub-vendors .

1. Where does L&T Chiyoda stand?
2. Bechtel: is it a consultant only?
3. Lots of major contracts won by L&T lately are jointly with a "consortium" partner. Does it mitigate the risks you pointed out?
4. Your views on Punj Lloyd v/s L&T please.

Basantji, kulman, thanks for your positive response to my post, appreciate it. Here are the replies to some of the queries raised by both of you:

 1) With regards to basantji;s query on my present business , I 'm with a chemical process industry and a mechanical engineer by qualification. So I would be the end user or client for companies such as the ones discussed. additionally since I handle  projects,contracts and corporate planning divisions, my job includes floating these kinds of global tenders, finalising contracts and executing them.

1. These large contracts have L.D./Penalty clauses for delayed deliveries upto 5~10%. Is it a big risk considered that margins are already low. How does L&T fare on timely executions/committments?
2. There are lots of job openings in Middle-east in Projects field. Is there severe crunch of good people? Does it affect L&T to a large extent in properly executing orders?

 Thanks, bubblevision and us121, the beauty of this site is there are people with different areas of core competency and we can all learn and benifit from one another (thanks to basantji!)

Another good post. Aaj kuchh aur seekhne ko milaa.

Just one observation: ...the beauty of this site is there are people with different areas of core competency.... Mera competency yehi hain ke main TED forum se fokat mein seekhta hoon! 

1. Special Pipes for oil/gas: Welsp Guj, Man Ind, Jindal Saw, PSL, Mah Seamless, Ratnamani etc
2. Transformers: Bh Bijlee, Emco, Voltamp, Indotech etc

Thanx a lot catcall.

I could learn something about engg companies which i never knew.

I was wondering why L&T is showing only a 10% growth in sales when it has so much orders in hand. Again BHEL reasoning for loosing out, is an eye opener.

Thanx a lot and keep posting such articles.

I agree on the companies for water treatment plants mentioned, though Thermax and Ion exchange are the leaders in this field among the listed entities. Incidentally, Therax and Voltas also share a unique market position in the sale of Vapour Absorption Units (VAMs) for refrigeration and chilled water units. These are the in things these days for a wide range of  applications varying from Air Conditioning in Five star Hotels to Chilled water Units in process plants and both have huge order bookings on this front, and are likely to remain overbooked on this front.

With regards to VFDs (variable speed drives ), both ABB and Seimens are comparable though Seimens USP remains large capacity Turbines

1. PLCs: ABB, SIEMENS, ALEN-BRADLEY, GE FANUC, MESSUNG
2. DCS: ABB, SIEMENS, HONEYWELL, EMERSON

Your views/comments please.

For DCS systems,ABB and Honywell would rate as the best followed by foxbro and then by Yokagawa.Emersion as a DCS system would be recommended only in batch process plants such as pharma companies, but not in hydrocarbon process plants.

For PLC systems,ABB and Seimens would rate at the top followed by GE Fenug and Alan Bradley. I have no experience of Messung systems.

The Electrical & http://www.valuenotes.com/asps/IndustryArticles.Asp?Cat=I&Id=58 - Electronics Division (EBG) of Larsen & Toubro Limited (L&T), India's leading technology, http://www.valuenotes.com/asps/IndustryArticles.Asp?Cat=I&Id=31 - engineering & http://www.valuenotes.com/asps/IndustryArticles.Asp?Cat=I&Id=93 - construction company, has filed 80 patent applications in 2006-07. The Powai campus accounted for 52 patents while the rest came from its Mysore campus. With this, the tally of patents in L&T's Electrical & Electronics Division has touched 247, a landmark for an Indian company.

The patent applications have been filed on innovations made on a variety of low voltage indigenously developed switchgear products like the air circuit breakers (ACBs) and moulded case circuit breakers (MCCBs), medical products, petroleum dispensing pumps, tooling solutions and switchboards. The large number of patents is a testimony to the creativity, competitiveness and cutting-edge technology inherent in L&T's design and development activity, making it a global player in its businesses.

Does L&T deserve to have a FY07 PE of 40 while BHEL has to make do with 29? I find it difficult to believe that L&T would continue to grow at 35 - 40% CAGR over the next 2 - 3 years.

Of course, I never entered ABB/Siemens because I didn't believe they deserved a PE of 45+

“If I don’t build focus, I’m not competitive against companies, globally,” says Naik.

·         After West Asia, L&T sets eyes on Africa

Engineering and construction major Larsen & Toubro believes that global operations are expected to contribute substantially over a period of time to overall turnover of the company and hope that revenue from these operations will touch 20% of the turnover in due course against 15% to 16% now. Having entered into the West Asia for developing, hotels, oil, power, commercial buildings, the company is looking at entering the African markets in a big way and will participate in the bidding of laying transmission and distribution lines.

Complete story: http://www.financialexpress.com/fe_full_story.php?content_id=168802 - here on FE

• http://www.moneycontrol.com/india/news/business/lt-forms-separate-cos-for-power-projects-ship-building/07/10/289774 - L& T has formed separate companies for power projects and shipbuilding , A M Naik, Chairman and MD, Larsen and Toubro, said.

He added that L&T may unlock value in power and shipbuilding after five years. They see Rs 1,000 crore revenue potential per annum in railway modernisation in three years.

The L&T capital goods business could have grown 25% more but for the China impact, according to Naik.  (source: MC)

L&T to initiate big restructuring

India’s largest publicly traded engineering and construction company, Larsen & Toubro Ltd, is planning a significant restructuring of its businesses—some 62 units under six divisions and three subsidiaries.

The company’s existing divisions are being reorganized into 12 verticals.

“We have not yet finalized the structure of L&T,” said Naik. “We do not know whether it will be made into a holding company and subsidiaries will do all businesses. Our focus is to divide various busineses into verticals to get operational efficiency.”

Admitting that the company has become complex, Naik said: “Adding to the existing complex structure will not bring talent or corporate governance to the company. We need to bring in certain focus on individual businesses.” The exercise will also unlock shareholder value, he noted.

The company has already set in motion the recast plan by forming L&T Power Projects Ltd and L&T Power Development Co. While L&T Power Projects will be the investment arm for all power projects, the other subsidiary will execute coal-fired and multi-fuel power plants. L&T already has a small presence in hydropower with 70MW under construction in Himachal Pradesh.

“The hydropower business will be under the construction division, as it is a construction-oriented business,” Naik said. He also said the company is actively considering managing nuclear power plants once the sector opens up for private participation. That division will continue to operate under the heavy engineering division.

The firm’s foray into shipbuilding will be spearheaded by a new company to be announced by April 2008.

The firm is also considering a foray into equipment manufacturing for the hydrocarbon sector—from drilling rigs to laying pipelines. The business will be spun off into a separate company that will look at opportunities in refineries, drilling rigs, petrochemical plants and pipelines as well as the gas business in India.

The firm’s defence manufacturing division will operate under the heavy engineering division, after the government grants it Raksha Udyog Ratna status, putting L&T on a par with public sector defence equipment manufacturers and defence ordnance factories.

The rail equipment manufacturing business, according to Naik, will operate as a division of the company that is considering entering coach manufacturing, signalling systems and developing the Delhi-Mumbai freight corridor. “In railways we are picking up small pieces that exist in the company like light signaling, railway electrification and civil work... and will combine all these to form one integrated railway group,” he said.

uh oh.. looks like L&T has really caught the 'spinoff fever'.

Anyway, looks like L&T might get government support.

L&T builds on Holck-Larsen’s legacy

Holck-Larsen once said, “If you want to belong to a country which is becoming a nation, you have to keep the economy growing by creating jobs. And you can only do that by investing in tomorrow, and tomorrow is made by people.” Today, retaining good people to work in less fashionable engineering and construction jobs is one of the biggest challenges the company faces.

 “We are looking at a 25% growth in some areas of critical operations,” confirms JP Nayak, president, machinery & industrial products. The company saw tough times in the form of intense competition from counterparts in neighbouring China, but is looking to robust days ahead. “Our order book is a reflection of the Indian economy, and the economy is booming at present,” says Nayak.

Chairman Naik is a trifle more guarded. “It feels great to be at the helm of affairs at such a time, but my concerns are about the future.” Naik says he is already working on a plan for 2015, adding that he wants to leave a clear future strategy for his successor to work upon.

Holck-Larsen is credited with laying out quality-oriented principles, including recruitment and promotion by merit, democratic management and provision of excellent working conditions and development of indigenous know-how and capabilities--attributes that have created a certain employee loyalty. Naik himself has spent 43 years with the company, so have senior management members like JP Nayak and MV Kotwal, who have spent more than three decades each.

“One of the major attributes of this company is that it gives you an opportunity to challenge yourself, freedom to work on projects that interest you,” says Kotwal, now a senior executive VP at the company’s heavy engineering division. This attribute stood the company in good stead even as it weathered takeover threats and intense competition.

Source: http://www.financialexpress.com/fe_full_story.php?content_id=169073 - article in F.E.

Kulman,

L& T is One of the Few Companies in India where the Buffet principle of