17 April 2013
Update |Sector: Capital Goods
Larsen & Toubro
CMP: INR1360
TP: INR 1714
BUY
L&T‐IDPL top’s NHAI’s CY13 pre‐qualification list; Number of
enlisted players halve, competitive intensity easing
(LT IN, Mkt Cap USD15.3b, CMP INR1,360, TP INR1,714, 26% Upside, Buy)
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National Highway Authority of India (NHAI) has released its latest list of pre‐
approved players applicable up to Dec‐13. L&T IDPL has emerged as the #1
player (up from #2 during 2011). The list contains 61 infrastructure players,
down from 114 in 2011, who can directly bid for highway projects awarded by
NHAI during 2013.
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Number of smaller players who can bid for projects up to INR25b has almost
halved to 41 from 87 in 2011. We believe this is significant given the fact that
almost 85% of projects awarded over FY12‐13 were below or equal to INR25b.
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The actual award for FY13 has been rather muted at 891km (9 projects), v/s
target to award 7‐8,000km. However, this could mean accelerated project
award during FY14 now with the annual pre‐qualification exercise over.
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Being a significant player in road segment, L&T IDPL is likely to be beneficiary of
decreasing competitive intensity. Although number of players active players in
the road segment still remains very high, departure of non‐serious players
would lead to reduction in price under‐cutting as established players are likely
to adopt more disciplined pricing approach.
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Maintain Buy, with SOTP‐based price target of INR1,714.
L&T Valuation Summary (INR b)
L&T‐IDPL at top of NHAI’s CY13 annual pre‐qualification list; significantly lower
number of players suggest disciplined competition
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L&T‐IDPL tops NHAI’s pre‐qualification list:
NHAI has released its latest list of
pre‐approved players applicable up to Dec‐13. L&T‐IDPL has emerged as the #1
player (up from #2 during 2011). The list contains 61 infrastructure players,
down from 114 in 2011, who can directly bid for highway projects awarded by
NHAI during 2013. During 2013, top 9 players (down from 10 in 2011) are
qualified to directly bid for projects above INR50b while 21 players (up from 17
during 2011), including players enlisted in above INR50b bracket, can bid for
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projects worth INR25‐50b. The increased number of players in INR25‐50b
bracket is largely due to movement of 8 players from below INR25b category
while 4 players have been removed.
Small players significantly lower:
A key highlight is halving of smaller players
(eligible to bid projects below INR25b) to 41 from 87 in 2011. This becomes all
the more significant given that almost 85% of projects awarded over FY12‐13
were below or equal to INR25b.
Large players to benefit from lower competition:
In our view, larger/serious
players such as L&T‐IDPL would be the biggest beneficiary of decreasing
competitive intensity. Although number of players active players in the road
segment still remains very high, departure of non‐serious players would reduce
price under‐cutting as established players are likely to adopt more disciplined
pricing approach.
Backdrop:
NHAI had initiated an exercise to pre‐approve bidders on technical
criteria to do away with evaluation of the same for each project award for a year. In
March 2011, NHAI had invited application from the players to assess their Request
for Annual Pre‐qualification (RFAQ) to be valid till December 2011. The initiative was
intended to cut short the total time taken in project award from the stage of RFQ
(Request for Qualification) to RFP (Request for Proposal) and final award of the
project. This could shorten the period (from qualification to award) from 4‐6 months
to 3‐4 months, i.e. savings of 1‐2 months.
FY12‐13 project award by NHAI
Distribution based on project length in kMs
Distribution based on project cost in INR b
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Actual awards however hold the key
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FY13 had begun with lot of optimism given NHAI’s FY12 order awards of
~8,000km. However, the actual award for FY13 has been rather muted at 891km
(9 projects) v/s target of 7,500‐8,000km. However, this could mean accelerated
project award from FY14, now with the annual pre‐qualification exercise over.
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Since March 2009, the average project award by NHAI has been ~1,780km,
which is again boosted due to higher project award during Mar‐May 2010
(1,000km+ each month) and extremely strong orders during FY12.
Trend
in yearly project awarded by NHAI (km)
Actual projects awarded in FY13
Key NHAI projects in the books of L&T (INR m)
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Valuation and View
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In our view, LT is a strong play on India’s imminent economic recovery, with core
business having robust operating leverage.
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Maintain Buy with SOTP‐based price target of INR1,714.
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L&T: SOTP Valuation
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