India Infra- LT

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ASIALarsen & ToubroProxy to India Investment Theme

Larsen & Toubro (L&T) is among the largest E&C companies in India today. L&Thas expertise in design, engineering and construction across various industries,

including oil & gas, petrochemicals, refineries fertilizers, metals and power. It is

one of the largest players in the domestic infrastructure sector and has a presence

across all segments, namely, roads, ports, urban infrastructure and airports.

Massive capex programmes, coupled with the governments renewed thrust oninfrastructure development, indicate a huge opportunity for engineering &construction (E&C) companies. L&T, which is one of the leading E&C firms inIndia, is a strong play on this boom. With increasing size and complexity ofprojects, L&T has a distinct advantage over its peers, given its stronger technicaland financial strengths, in our view.

There is strong earnings visibility as we expect the order book to continue to growat 31% p.a. over FY07-10. We expect to see marginal improvement in marginsas well. Key L&T subsidiaries are expected to record earnings growth in excess of30% p.a. over the next three years. We expect further value to emerge from somesubsidiaries over the next three years.

The company is undertaking further initiatives to capitalize on certain opportunitiesthat should help sustain growth and profitability over a longer period of time.Some of these include investments in power equipment manufacturing,shipbuilding, defence equipment manufacturing, and investments in the MiddleEast and infrastructure as a developer.

Key risks to our growth assumptions include an economic slowdown and politicaluncertainty adversely impacting policy initiatives, particularly in the infrastructurespace.

FY06 FY07 FY08E FY09E FY10E

Revenues (INR mn) 147,640 176,142 225,309 301,512 413,514Core EBITDA (INR mn) 10,667 17,786 24,658 33,431 46,865EBITDA (INR mn) 15,013 22,055 30,214 39,189 53,095PAT (INR mn) 10,186 14,030 18,551 23,646 32,167Shareholders funds (INR mn) 46,402 57,684 74,647 92,486 118,845Core EBITDA margins (%) 7.2 10.1 10.9 11.1 11.3EBITDA margins (%) 10.2 12.5 13.4 13.0 12.8Net margins (%) 6.43 7.97 8.23 7.84 7.78

RoE (%) 21.4 30.8 35.2 39.0 41.6Source: Lehman Brothers estimates

BASIC INDUSTRIES

India Infrastructure &Construction

Ticker: LART.NSPrice (11 Oct 07): 3486.65

Exchange: BSESENSEX: 18,814

Saion Mukherjee91.22.4037.4184

[email protected], India

Tanuj Shori91.22.4037.4028

[email protected], India

Analyst Certification

We, Saion Mukherjee and TanujShori, hereby certify (1) that theviews expressed in this research

report accurately reflect ourpersonal views about any or all

of the subject securities or issuersreferred to in this report and (2)

that no part of our compensationwas, is or will be directly or

indirectly related to the specificrecommendations or views

contained in this report.

October 16, 2007

http://www.lehman.com


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HEREIN SHALL FORM THE BASIS OF ANY CONTRACT OR COMMITMENT WHATSOEVER.

This report has been prepared by Saion Mukherjee and Tanuj Shori, employees of Lehman Brothers Securities Private Limited,

to provide background information about Larsen & Toubro Limited (the Company). Lehman Brothers Securities Private Limited

or an affiliated company of Lehman Brothers Securities Private Limited (collectively, Lehman Brothers) is or may be a member

of the underwriting group in respect of a proposed offering of securities of the Company. This report has been producedindependently of the Company and the forecasts, opinions and expectations contained herein are entirely those of Lehman

Brothers. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forecasts,

opinions and expectations contained herein are fair and reasonable, neither Saion Mukherjee and Tanuj Shori nor Lehman

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participate in an offering of the Companys securities. Any opinions, forecasts or estimates herein constitute a judgement as at

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incomplete or condensed and it may not contain all material information concerning the Company. Any decision to purchase

securities in any offering of the Companys securities should be made solely on the basis of the information to be contained in

the final offering circular to be published in due course in relation to such offering.


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Valuation disclosure

The projections, expectations, forecasts and valuations described in this report were

based upon a number of estimates and assumptions and are inherently subject to

significant uncertainties and contingencies. Projections, expectations, forecasts and

valuations are necessarily speculative in nature, and it can be expected that one or more

of the estimates on which the projections, expectations, forecasts and valuations werebased, as the case may be, will not materialize or will vary significantly from actual

results, and such variances will likely increase over time. All projections, expectations,

forecasts and valuations described in this report have been prepared solely by the

authors of this report independently of the Company. These projections, expectations,

forecasts and valuations were not prepared with a view toward compliance with

published guidelines or generally accepted accounting principles. No independent

accountants have expressed an opinion or any other form of assurance on these

projections, expectations, forecasts and valuations. You should not regard the inclusion

of the projections, expectations, forecasts and valuations described herein as a

representation or warranty by or on behalf of the Company, Lehman Brothers, the authorsof this report or any other person that these projections, expectations, forecasts and

valuations or their underlying assumptions will be achieved. For these reasons, you

should only consider the projections, expectations, forecasts and valuations described in

this report after carefully evaluating all of the information in this report, including the

assumptions underlying such projections, expectations, forecasts and valuations.


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Table of Contents

Investment argument .........................................................................................5Investment risks ................................................................................................8Valuation...................................................................................................... 10Financial statements........................................................................................16Financial outlook............................................................................................18Company background....................................................................................24The road ahead ............................................................................................ 42Industry outlook Set for an inflection ................................................................48Indian construction industry ..............................................................................58


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Investment argument

A strong play on Indias capex and infrastructure investment story

Corporate Indias capacity utilization is at a 15-year high, debt-equity ratio is near an all-

time low, and the capex-profit ratio has just begun to rise. Massive capex programmes,

coupled with the governments renewed thrust on infrastructure development, indicate a

huge opportunity for engineering & construction (E&C) companies. We expect industrial

capex over next five years to be 2.6x the investment in the past five years. Similarly in

the infrastructure space, investments in the Indian governments XI plan period (FY08-12)

are expected to be around 2.45x the investment in the X plan (FY03-07). L&T, which is

Indias premier E&C firm, is a strong play on this boom. L&T has a dominant position in

the oil and gas and metal space with a market share in excess of 30%. Both of these

segments are expected to witness strong growth in capex. Similarly in the infrastructure

space, L&T holds leadership positions in airports and power. The size and complexity of

the projects are increasing. For instance, for road projects, the average order size can

be as large as 100 km compared to 15-20 km two years ago. L&T is much larger

compared to most of its peers and possesses the technical and financial strength toaddress the opportunity, in our view.

Figure 1: Average industrial capex inflection over the next five years

Source: Capital-line, Lehman Brothers estimates

148 224

1,785

253350600

4,004

1,416

0500

1,0001,5002,000

2,5003,0003,5004,0004,500

Automobiles and Auto Cements Oil/gas Metals

(INR bn)

Capex over last 5 years 2002-07 Capex over next 5 years 2007-12


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Figure 2: Inflection in infrastructure spending

(INR bn)

13,500 14,400 15,50016,900 18,000

24,700

32,20038,400

46,600

57,300

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY03 FY04 FY 05 FY06 FY07 FY08 FY 09 FY10 FY11 FY12

Note: The above numbers include storage and city gas distribution. In our discussion on infrastructure weexclude storage and gas distribution. In any case it forms just 2% of the investment.Source: Planning commission documents, Lehman Brothers estimates

Expect growth momentum to continue

L&Ts order book has shown robust growth even off a large base. We expect the order

book to continue to record a CAGR of 31% over FY07-10. We expect L&T to capture a

significant market share of the projected domestic industrial capex. Competition is much

stiffer in the infrastructure sector among the existing players, but given L&Ts proven

execution capabilities and size to capture bigger projects, we believe that it will capture

a decent share in the infrastructure segment as well. The complexity of projects is rising

and hence we believe that L&T with the requisite financial and technical expertise is at

an advantage. We project a revenue CAGR of 34% over FY07-10.

Margins have recorded improvements across all business segments in FY07. The netmargins improved 106 bps to 7.96% in FY07. The improvement was driven by

operational efficiencies, improved margins in new projects and operating leverage. We

expect to see marginal improvement in margins as well. We expect L&T to deliver 34%

growth in EBITDA over FY07-10.

Strong up-tick in subsidiary financials

Subsidiary financials registered a steep improvement in FY07. Subsidiaries contributed

53% of consolidated profits in FY07 and recorded growth of 176% over the previous

year. The key contributors were L&T Infotech, L&T-IDPL (equity dilution of IDPL stake and

sale of operating BOT (build, operate, transfer) projects) and manufacturing subsidiaries.We expect L&T Infotech, L&T Finance and certain manufacturing subsidiaries to record

growth in excess of 30% over the next three years. Value discovery in some of the

subsidiaries is a strong possibility over the next three years. The initial public offering

(IPO) of L&T Infotech is expected in 2008, according to the company.


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Enough reinvestment options-

L&T is creating various opportunities for re-investing cash flows. According to the

company, as a long-term strategy, L&T will invest in scalable businesses where it can

leverage its strength in E&C. The focus will be on maximizing value creation and

avoiding commoditization. Going forward, the bias is towards design, engineering and

manufacturing rather than plain vanilla construction. L&T has planned investments tocapture potential opportunities in power equipment, shipbuilding, defence and the

Middle East investment boom. These initiatives should start contributing to the financials

from FY10 onwards and deliver returns in excess of the cost of equity, in our view.

We expect L&T to invest equity in infrastructure projects where it will participate as a

developer. We appreciate the potential risks involved in such projects, such as execution

risks etc. However, given L&Ts strong execution capabilities and prudence in selection of

projects, overall, we expect the portfolio of projects to deliver returns in excess of the cost

of equity.

We expect strong earnings growth over FY07-10

We expect earnings growth to remain strong. We project an earnings CAGR of 32%

over FY07-10 and RoE of 35% in FY08 (adjusted for investments in subsidiaries). We

believe the earnings growth is sustainable as order inflows are expected to remain strong

and there are possibilities of upside to margins.


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Investment risks

Macro risks

L&T is leveraged to investment in industrial capex and infrastructure in India. Any

delay in investments would present a significant risk to earnings and stock

performance.

Political instability or changes in the government resulting in significant changes in

policy initiatives would present risk to the infrastructure sector in particular. This could

delay the award activity in infrastructure projects.

The equity returns particularly for infrastructure projects under the Public Private

Partnership (PPP) are sensitive to interest rates. A hardening of interest rates would be

a negative.

L&T Infotech, which is mainly dependent on US sales, could be adversely impacted

by any appreciation of the rupee against the US dollar.

Cement and steel are two key raw materials used in construction. Any significant rise

in cost could impact near-term earnings adversely.

Company-specific risks

Robust growth in order book and execution for the same will become a key factor

for the companys performance. An inability to conclude a project on time could

impact its earnings adversely.

Managing growth may come under stress in case the company fails to attract and

retain talent. Given strong growth in construction and the capital goods industry,

there is a shortage of talented manpower in the industry.

The company plans to invest equity in new ventures and we have factored in

potential upside from these investments. Some of the investments of importance are

power equipment manufacturing, shipbuilding and BOT infrastructure projects. Any

delay in execution would impact potential value discovery adversely.

Regulatory risks

We have assumed a benign regulatory environment as far regulations for investment

in infrastructure are concerned. The Indian government has taken policy initiatives to

attract private investment into infrastructure. Any significant policy changes could,

therefore, present risk to our optimistic assumptions.

Oil and gas, metals and power are the key sectors for L&T. Any adverse regulatory

changes in these sectors could present a risk.


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Competition

We have assumed that L&T will continue to post robust growth even off a large base and

that the company can continue to maintain market share in the segments in which it

operates. Our assumptions are based on L&Ts stronger technological, execution and

financial strengths. Aggressive competition from local or foreign players could impact

these growth assumptions adversely.


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Valuation

We have valued L&T using the sum-of-the-parts (SOTP) methodology. Core E&C business

(L&T standalone) is based on the dividend discount model (DDM) methodology. One-

year forward value of the E&C business is between INR718 bn and INR1,010 bn. To

this value, we have also added values for L&T Infotech, L&T Finance, Capital and

Infrastructure Finance, L&T IDPL, the housing company for L&Ts BOT projects, L&Ts ECCand EC&Ps subsidiaries and associates, manufacturing associates, foreign subsidiaries,

as well as value for L&Ts holding in Ultratech Cement. Hence, our target valuation range

is between INR924 bn and INR1,292 bn.

Figure 3: Sum-of-the-parts valuation

BusinessBest-case scenario(INR bn) Base case scenario(INR bn)

Core E&C business 1010 718SubsidiariesL&T Infotech 53 47

L&T Finance+ Infrastructure Finance+ Capital 53 38

L&T IDPL 81 27

Engineering construction & project subsidiaries and

associates

14 11

Manufacturing associates 34 31

Foreign subsidiaries 28 24

Ultratech Holding 18 18One-year target valuation (September 2008) 1292 924US$ bn 32 23Source: : Lehman Brother estimates

E&C business valued between INR 718 bn and INR 1,010 bn

We value the base E&C business based on a dividend discount model. The key

assumptions of the model are:

Explicit earnings and RoE projections until FY10

Earnings are adjusted for the dividend income from the subsidiaries

30% adjusted earnings growth from FY11-13

Post FY13, the adjusted earnings gradually drop to terminal growth by FY17

Terminal growth at 5% and 6% after FY17 for the base and best case respectively

RoE drops to 30% by FY17 and maintained thereafter

Discount rate of 12% for the base-case and 11% for the best-case scenario.


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With the above assumptions we arrive at our one-year forward fair value range of

INR718 bn INR1010 bn. Our one-year forward fair value range represents an

earnings multiple range of 26.3x 36.9x one-year forward earnings after adjusting for

the dividend income from subsidiaries.

The valuation range of the subsidiaries is estimated at INR196-287 bn as detailedbelow. If we were to adjust for the valuations of the subsidiaries using this range, L&T

base business is then currently trading at a forward earnings multiple of 34.9-39.1x.

Dividend discount model

Valuation of L&T IDPL

Best-case analysis

L&T IDPL is the holding company for all of L&Ts BOT projects (except in the power

sector), and L&T plans to pursue all BOT projects through IDPL. L&T holds a 78.4% stake

in L&T-IDPL. We value L&T IDPL using a sum-of-the-parts methodology:

Disclosed infrastructure projects

L&T- Urban infrastructure Ltd (L&T-UIL) which is a subsidiary of L&T-IDPL. L&T IDPL holds

75% in L&T-UIL

Growth value of future investments

Figure 4: Valuing disclosed infrastructure projects

Projects Holding Equity value(INR m) one-year forward CommentsL&T transportation infrastructure Ltd 1 2642 This is an operational road project. Valued on DCF. Discount rate of

10% used. Valuation implies P/B of 6x.Narmada Infrastructure Construction

Enterprises Ltd

1 1761 This is an operational road project. Valued on DCF. Discount rate of

10% used. Valuation implies P/B of 3.5x.

Kakinada Seaports 0.39 2072 This is a very profitable operational port project. Valued on DCF.

Discount rate of 10% used. Valuation implies P/B of 15.6x.

Western India Tollbridge Ltd 1 380 This is an operational road project. Valued on DCF. Discount rate of

10% used. Added cash on books. Valuation implies P/B of 2.6x.

Second Vivekananda bridge tollway 0.33 869 Just operationalised BOT. Valuation based on 1.7x equity invested.

International seaports Haldia Pte Ltd 0.22 390 Based on 7x equity

L&T panipat elevated corridor 1 927 Under implementation. Assumed 18% equity IRR.

L&T Krishnagiri Thopar tollroad 1 1006 Under implementation. Assumed 18% equity IRR.

L&T Vadodara Bharuch 1 2240 Under implementation. Assumed 18% equity IRR.

L&T Western Andhra tollways 1 644 Under implementation. Assumed 18% equity IRR.

L&T interstate road corridor 1 862 Under implementation. Assumed 18% equity IRR.

Dhamra ports company 0.5 176 Under implementation. Assumed 20% equity IRR.

Bangalore International Airport 0.17 366 Under implementation. Assumed 25% equity IRR.Total 14335Source: Company, Lehman Brothers estimates


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As of March 2007 L&T-IDPL has already invested INR 5.05 bn in various infrastructure

projects. Therefore the valuation implies a multiple of 2.4x equity invested.

Valuing L&T-UIL

L&T IDPL holds a 75% stake in UIL with 25% being held by HDFC which was brought in

as a strategic investor in the business. L&T IDPL and HDFC have invested INR5,720 mnas equity in L&T UIL (FY07). We have valued L&T-UIL business at 1.83x book assuming

RoE of 22% from the venture. The March 2007 value of L&T-UIL is INR10.5 bn. L&Ts

share in IDPL is valued at INR7,309 mn (one-year forward value).

In FY07, HDFC infused INR950 mn for a 25% stake in the L&T-UIL. This values L&T-UIL at

INR3,800 mn. We understand HDFC came in as a strategic partner and there has been

significant growth in the portfolio since the entry of HDFC. Therefore HDFCs funding is

not the correct valuation benchmark, in our view.

Valuing growth

Management has guided that it will invest around INR4-5 bn as equity in each of the

coming few years in L&T IDPL. To value the growth potential we assume that L&Ts

investment shall grow in line with the investment in infrastructure in the economy. Our key

assumptions are:

Currently L&Ts annual investment in IDPL is 0.16% of the Gross Capital Formation in

Infrastructure (GCFI). We assume this ratio to continue

Nominal GDP growth of 13.2%, 14.5% and 14.5% in FY08, FY09 and FY10

respectively. Nominal GDP growth of 13% from FY11-17. 8% Nominal growth is

assumed until FY20 and thereafter 5%.

GCFI is expected to increase gradually from 5% currently to 10% by FY20. Terminal

year GCFI assumed at 3%.

18% equity return generated from these investments.

Terminal growth rate of 3% and discount rate of 12%.

This gives us a one-year forward value of INR62,063 mn.

As per the recent consultation paper from the planning commission, the private investment

in infrastructure other than power is estimated at INR1940 bn over the next three years.

Assuming a debt:equity of 80:20, equity investment shall be INR388 bn. L&T IDPLs

equity investment of INR15 bn (INR5 bn every year in infrastructure other than power

over next three years) over next three years represents a market share of only 3.9%.

Therefore, we believe that investments planned by L&T-IDPL in the infrastructure projects

can go up with more opportunities coming up.


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Figure 5: Figure: Valuation of L&T-IDPL

L&T-IDPL value (INR mn) L&T value (INR mn)Existing infrastructure projects 14,335 11,239

L&T-UIL 9,322 7,309

Growth value 79,162 62,063Total 102,820 80,611Source: Company, Lehman Brothers estimates

Assuming an investment of INR 9 bn over the next two years our valuation implies a P/B

to 4.9x FY09 book.

Base-case analysis

For the base case we have valued L&T IDPL on the basis of stake sale to IDFC and JP

Morgan. IDFC picked up 21.6% stake of IDPL for INR5,500 mn in April, 2006. This

would value L&Ts stake in L&T IDPL at INR1,9963 mn. Rolling forward this value for

2.5 years at 12% cost of equity, we arrive at one-year forward value of INR26,501 mn.

We have taken this as the base valuation figure for L&T IDPL.

L&T Infotech valued between INR47 bn and INR53 bn

We have valued L&T Infotech between INR47 bn and INR53 bn. Our valuation range is

based on the multiple imputed on FY09 earnings. We have imputed a multiple of 14x

and 16x for the base and best case respectively to arrive at a March 2008 value. We

then rolled forward the value for six months at a 12% cost of equity to arrive at a one-

year forward value. The company is expected to record earnings growth of 40% and an

RoE of 40%.

L&T Finance and Infrastructure Finance valued between INR38 bn and INR53 bn

We have valued L&T Finance and Infrastructure finance between 2.5x and 3.5x FY09E

book value to arrive at a March 2008 value and then rolled it forward at a 12% cost of

equity to arrive at a one-year valuation range. L&T finance has a RoE of 17% and is

expected to grow in excess of 50% over the next three years.

Engineering and construction subsidiaries and associates valued between INR11 bnand INR14 bn

We have valued L&T-Ramboll, Voith Paper, HPL CoGen, India Infrastructure Developers,

L&T Sargent and Lundy Ltd, L&T Chiyoda and L&T Valdel. The entities are valued at times

earnings or book and are appropriately rolled forward.


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Figure 6: Engineering and construction subsidiaries

L&T Holding L&Ts Value in INR m (one-year forward) CommentsL&T Ramboll Consulting Engineers Ltd 50% 982 1,178 25-30x FY09. Expected to grow by 50%-80%

over the next 3 years

Voith Papers Technology Ltd 50% 3,006 3,606 25-30x FY09. Expected to grow by 50%-

100% over the next 3 years

International Seaport Dredging Limited 61% 629 838 25-30x FY09. Expected to grow by 20%-25%over the next 3 years

HPL Cogeneration 51% 4,080 4,663 The plant valued at a RoE range of 35%-40%.

India Infrastructure developers 100% 719 1079 Valued at 1x 1.5x FY07 book

L&T Sargent & Lundy Ltd 51% 219 233 15x 16x FY09 EPS

L&T Chiyoda 50% 1,156 1,387 25x 30x FY07 profit

L&T Valdel 50% 603 -724 25x - 30x FY07 profit

Total 11,393 13,708

Source: Company, Lehman Brothers estimates

Manufacturing associates valued between INR 30 bn and INR34 bn

The entities valued are: Audco India, L&T Komatsu, L&T Case, EWAC alloy, L&T Demag,Tractors Engineers Ltd. The entities are valued at times earnings and are appropriately

rolled forward.

Figure 7: Manufacturing associates

Holding L&Ts Value in INR m (one-year forward) CommentsAudco India limited 50% 6,444 7,581 17x20x FY09 earnings. Expected to grow in at 17% over the next 3

years

L& Komatsu 50% 12,052 13,257 20x-22x FY09 earnings. Expected to grow in excess of 30% over the

next 3 years

L&T case Equipment 50% 3,855 4,240 20x-22x FY09 earnings. Expected to grow in excess of 30% over the

next 3 years

EWAC alloys Ltd 50% 3,449 3,794 20x-22x FY09 earnings. Expected to grow in at 20% over the next 3years

L&T-Demag Plastics 50% 494 - 543 20x-22x FY09 earnings. Expected to grow in at 20% over the next 3

years

Tractors Engineers Ltd 100% 4,339 4,772 20x-22x FY09 earnings. Expected to grow in at 20% over the next 3

yearsTotal 30,632 34,187Source: Company, Lehman Brothers estimates

Foreign subsidiaries valued between INR24 bn and INR28 bn

The entities valued are: L&T International FZE, L&T Oman, L&T Qatar, L&T Electromech,

L&T Saudi. The entities are valued at times earnings and are appropriately rolledforward.


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Figure 8: Foreign Subsidiaries

L&THolding L&Ts Value in INR m (one-year forward) CommentsL&T Oman LLC 65% 6,904 7,594 20x-22x FY09 earnings. Expected to grow at 25-30% over the next 3

years

L&T International FZE 100% 10,632 13,290 8x-10x FY09 earnings. Gains mainly from hedging activities. No

significant growth expected.L&T Qatar LLC 49% 828 20x FY09 earnings. Expected to grow in at 25-30% over the next 3

years

L&T Electromech 65% 5,394 5,934 20x-22x FY09 earnings. Expected to grow in excess of 30% over the

next 3 years

L&T Saudi LLC 95% 454 10x FY09 earnings. Growth muted. Not much visibility.

Total 24,213 28,100


Holding in Ultratech Cement: INR18 bnL&T holds 14.3 mn shares of Ultratech Cement (11.4% of the company). The lock-in

period for these shares ended in June 2007, but the company has not sold off its stake,

though it has indicated that it might not be interested in a long-term holding of this stake.

The valuation is based on the current price.


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16 October 16, 2007

Financial statements

Standalone P&L Statement

Figure 9: Income Statement

Year-end 31 Mar (INR mn) FY06 FY07 FY08E FY09E FY10ENet sales 147,640 176,142 225,309 301,512 413,514

Operating expenses -136,973 -158,356 -200,651 -268,081 -366,649

Manufacturing, construction & operating expenses -115,603 -130,782 -166,162 -222,360 -304,960

Staff expenses -8,925 -12,582 -15,788 -20,695 -27,367

Sales, administration & other expenses -12,444 -14,992 -18,701 -25,025 -34,322Core EBITDA 10,667 17,786 24,658 33,431 46,865Other income 4,346 4,270 5,556 5,758 6,229EBITDA 15,013 22,055 30,214 39,189 53,095Interest -751 -339 -720 -1,244 -1,520

Depreciation & amortization -1,160 -1,715 -2,214 -2,914 -3,564

Company's shares in Profits of JVs 64 0 0 0 0

Overheads charged to fixed assets 19 33 0 0 0

Transfer from revaluation reserve 15 14 0 0 0

Pre tax profit 13,201 20,049 27,280 35,031 48,011

Provision for taxation -3,713 -6,019 -8,730 -11,385 -15,844

PAT before extraordinary items 9,488 14,030 18,551 23,646 32,167

Extraordinary items 698 0 0 0 0Net profit 10,186 14,030 18,551 23,646 32,167Source: Company data, Lehman Brothers estimates

Note: core EBITDA figures are analyst estimates

Standalone balance sheet

Figure 10: Balance SheetYear-end 31 Mar (INR mn) FY06 FY07 FY08E FY09E FY10ECurrent assets 95,365 118,847 146,366 194,192 263,432

Investments 19,195 31,044 41,044 51,044 61,044

Net fixed assets 16,046 22,247 32,533 42,120 49,556

Other non-current assets 1,545 1,745 1,745 1,745 1,745Total assets 132,152 173,883 221,689 289,102 375,778Current liabilities & provision 69,116 93,373 120,436 159,790 216,106

Total debt 14,536 20,778 24,558 34,778 38,778

Other liabilities 2,098 2,049 2,049 2,049 2,049Total liabilities 85,750 116,199 147,042 196,616 256,933Share capital 275 567 574 574 574

Reserves & surplus 26,014 35,575 48,318 66,156 92,516

Other funds 20,113 21,543 25,756 25,756 25,756Shareholders' funds 46,402 57,684 74,647 92,486 118,845Total equity & liabilities 132,152 173,883 221,689 289,102 375,778

Source: Company data, Lehman Brothers estimates


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Standalone cash flow statement

Figure 11: Cash Flow Statement

Year-end 31 Mar (INR mn) FY06 FY07 FY08E FY09E FY10EPre-tax profit 11,757 20,035 27,280 35,031 48,011

Depreciation 1,145 1,715 2,214 2,914 3,564

Total tax paid -3,297 -6,275 -8,730 -11,385 -15,844Chg in working capital 4,087 5,887 -4,494 -7,724 -12,879

Other operating activities 179 0 0 0 0Cash flow from operations (a) 13,693 21,361 16,270 18,835 22,852Capital expenditure -5,816 -6,999 -12,500 -12,500 -11,000

Chg in investments -7,447 -11,849 -10,000 -10,000 -10,000

Other investing activities 0 0 0 0 0Cash flow from investing (b) -13,263 -18,848 -22,500 -22,500 -21,000Free cash flow (a+b) 429 2,513 -6,230 -3,665 1,852

Equity raised/(repaid) 103 165 4,220 0 0

Debt raised/(repaid) 931 6,242 3,780 10,220 4,000

Dividend (incl. tax) -3,912 -5,736 -5,808 -5,808 -5,808

Other financing activities 0 0 0 0 0

Cash flow from financing (c) -2,878 671 2,192 4,412 -1,808Net chg in cash (a+b+c) -2,448 3,184 -4,037 748 45


Standalone key ratios

Figure 12: Key ratios

Year-end 31 Mar FY06 FY07 FY08E FY09E FY10EGrowth (%)Revenue growth 12.0 19.3 27.9 33.8 37.1

Expenses growth 10.7 15.6 26.7 33.6 36.8

Core EBITDA growth 31.4 66.7 38.6 35.6 40.2EBITDA growth 44.1 46.9 37.0 29.7 35.5

Net profit growth 3.7 37.7 32.2 27.5 36.0Margins (%)Core EBITDA margin 7.2 10.1 10.9 11.1 11.3

EBITDA margin 10.2 12.5 13.4 13.0 12.8

Pre-tax margin 8.9 11.4 12.1 11.6 11.6

Net margin 6.43 7.97 8.23 7.84 7.78Profitability (%)ROE 21.4 30.8 35.2 39.0 41.6

ROCE 15.8 17.7 18.8 18.9 20.8

Source: Lehman Brothers estimates


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18 October 16, 2007

Financial outlook

L&T Standalone

Revenue CAGR of 33% and order inflow CAGR of 31% over FY07-FY10E

We expect L&Ts standalone gross revenues to grow at an annualised rate of 33% over

FY07-FY10. This growth is expected to be driven primarily by the E&C segment, in

which we expect a revenue CAGR of 35%. Total revenues are projected to be about

INR420 bn for FY10.

Figure 13: Revenue projections

INR mn FY07 FY08E FY09E FY10E CAGR (%)Total E&C 131,300 170,724 232,375 326,023 35.4

Total Electrical 18,450 24,908 32,380 42,094 31.6

Total MIP 17,950 22,012 27,028 33,231 22.8

Total Others 8,440 11,394 14,812 19,256 31.6Total 176,140 229,037 306,595 420,604 33.6Source: Company data, L Lehman Brothers estimates

We estimate that the share of exports in terms of total sales will go up from 18% currently

to 20.4% by FY10. We believe that due to high inflection in the planned investments

and thus available opportunities in the domestic infrastructure, it will be tough for the

company to increase its share of exports across segments significantly (although

management has guided to a higher share of exports of around 25% by FY10)

Figure 14: Revenues domestic and export breakdown

INR mn FY06 FY07 FY08E FY09E FY10ETotal domestic 121,220 144,680 190,635 246,827 334,746Total exports 26,420 31,460 38,402 59,769 85,858Total revenues 147,640 176,140 229,037 306,595 420,604% domestic 82.1 82.1 83.2 80.5 79.6

% exports 17.9 17.9 16.8 19.5 20.4


Similarly, on the order inflows side, E&C segment is projected to have a significant share

in total order inflows with a CAGR of 32% against an overall order inflow annualized

growth rate of 31.3% over FY07-FY10.


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Figure 15: Order inflow estimates

INR mn FY07 FY08E FY09E FY10E CAGR (%)E&C Total 252,490 332,859 439,188 580,003 31.9

Electrical 22,030 29,740 38,662 50,261 31.6

MIP 21,433 26,283 32,272 39,679 22.8

Others 10,078 13,605 17,686 22,992 31.6Total 306,030 402,487 527,808 692,935 31.3Source: Lehman Brothers estimates

Note: order inflows figures are analyst estimates

As a result of increasing order book, the order book coverage ratio stands to improve

from current 2.09 to 2.46 by FY10, according to our estimates. We believe the

company has the necessary skill sets and resources to maintain a good efficiency ratio

across the next three years.

Figure 16: Total order book coverage ratio

1.76

1.37

1.67

2.09

2.372.49 2.46

0

1

2

3

FY04 FY05 FY06 FY07 FY08E FY09E FY10E

(x)



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20 October 16, 2007

Figure 17: Order backlog

148.2162.3175.1 174.3170.3 168.0 170.2 179.1

183.2198.7

235.3 246.6

283.2306.7

357.1368.0

416.3

0

50

100

150

200

250

300

350

400

450

J S D M J S D M J S D M J S D M J

(INR bn)

FY04 FY05 FY06 FY07 FY08

Source: Company data

Expanding margins

The core EBITDA margin expanded substantially in FY07 from 7.2% to 10.1%. The

margin improvements were on account of a favorable business environment as new

orders came in at higher margins, operating leverage and corporate initiatives started in

FY06 such as cost control and global sourcing. The full impact of the initiatives and

favorable business environment was realized in FY07. The business environment is

expected to remain robust. However, the delta in margins realized in FY07 is unlikely to

be repeated, in our view. We expect core EBITDA margins to expand from 10.1% in

FY07 to 11.3% in FY10. Historically we have seen margins moving in line with the order

book coverage ratio, and the trend is expected to continue in our projections as we

expect the order book coverage ratio to stabilize at around 2.5 going forward.

Figure 18: Margin projections

7.2

10.110.9 11.1 11.3

10.2

12.513.4 13.0 12.8

0

2

4

6

8

10

12

14

16

FY06 FY07 FY08E FY09E FY10E

Core EBITDA margins EBITDA margins

(%)


Note: core EBITDA and EBITDA figures are analyst estimates


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We estimate EBITDA to grow at a CAGR of 34% over FY07-FY10, while we expect PAT

to grow by an annualized rate of around 32% over FY07-FY10 to reach INR32 bn at

the end of FY10. We project core EBITDA of INR24 bn and net profit of around

INR18.5 bn in FY08.

Figure 19: Growth in bottom line(%) FY05 FY06 FY07 FY08E FY09E FY10EGrowth in core EBITDA (YoY) 50.4 31.4 66.7 38.6 35.6 40.2

Growth in EBITDA (YoY) 22.7 44.1 46.9 37.0 29.7 35.5

Growth in PAT (YoY) 18.8 44.8 51.8 36.2 28.4 37.1


Note: core EBITDA and EBITDA figures are analyst estimates

Improving profitability

We believe L&T will continue to offer healthy returns on equity over the next three years.We expect standalone RoE (taking out the effect of investments in subsidiaries and

dividends from subsidiaries) to expand from 30.5% in FY07 to about 41% in FY10. We

also expect return on capital employed to rise from 17% currently to around 21% in FY10.

Figure 20: Profitability forecast

21.4

30.8

35.2

39.0

41.6

15.8

17.7

18.8

18.9

20.8

15 20 25 30 35 40 45

FY06

FY07

FY08E

FY09E

FY10E

Return on equity Return on capital employed

(%)



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L&T Infotech

We expect L&T Infotech to generate sales of INR18 bn in FY08E, with a margin

expansion of 60 bps over FY07.

Figure 22: L&T Infotech financials

FY05 FY06 FY07 FY08E FY09E FY10ERevenues (INR mn) 5,589 7,934 12,781 18,247 24,808 33,599

PAT (INR mn) 459 702 1,481 2,231 3,143 4,019

Margins (%) 8.2 8.8 11.6 12.2 12.7 12.0

Growth in PAT (%) 52.9 111.0 50.6 40.9 27.9


However, we have downplayed significant margin expansion in L&T Infotechs business

due to considerable rupee appreciation pressure.

L&T Finance

We expect the book value of L&T Finance to increase to INR12 bn by FY10 and we

also factor in a steady increase in RoE from current 16.6% to around 23% in FY10.

Figure 23: L&T Finance projections

FY05 FY06 FY07 FY08E FY09E FY10ERevenues (INR mn) 1,100 1,491 2,754 4,957 8,427 12,641

PAT (INR mn) 240 351 626 1,100 1,854 2,781

Growth in PAT (%) 78.8 46.2 78.2 75.8 68.5 50.0

Shareholder's funds (INR mn) 1,340 2,151 3,777 7,377 9,231 12,012

RoE (%) 17.9 16.3 16.6 14.9 20.1 23.2

Leverage 4.90 5.32 6.84 5.67 6.26 6.15


Note: RoE figures are analyst estimates


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Company background

Larsen & Toubro (L&T), incorporated in February 1946 is the among the largest E&C

companies in India today. It was converted into a public limited company in 1950. L&T

has no identifiable promoter group. Substantial amounts of shares are held by institutional

investors. The company is headed by Mr A.M.Naik, the Chairman and Managing

Director. L&T parent carries out its diversified activities through different divisions engineering and construction (E&C), electrical & electronics (E&E) and machinery &

industrial products. Furthermore, the company has subsidiaries and prominent among

them are L&T Infotech (IT services), L&T Finance (financial services), L&T-IDPL (developer of

infrastructure and real estate projects) and L&T International FZE (houses all international

subsidiaries). L&T is a market leader in the Indian engineering and construction industry

by virtue of its track record and its ability to offer a wide array of services. L&T has

expertise in design, engineering and construction across various industries, including oil

& gas, petrochemicals, refineries, fertilizer, metals and power. L&T has a dominant

position in the oil and gas and metals space in India. L&T is among the largest players in

the domestic infrastructure sector and has a presence across all segments, namely, roads,ports, urban infrastructure, airport, water and sanitation and railways. L&T is also a

market leader in electrical and electronics systems in India.

L&T has a well-diversified business mix. It is present across industry and infrastructure

segments. Its presence ranges from design and construction to manufacturing and

services. Some 82% of the revenues on a standalone basis accrue from the domestic

market (FY07). However, it is steadily increasing its presence in the international market

(mainly in the Middle East and China) through its E&C division and through its

subsidiaries and joint ventures.


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Figure 24: Company structure

LTLT

Engineering and

Construction

ECC

E & CP

HED

Engineering and

Construction

ECC

E & CP

HED

Electrical and electronicsElectrical and electronicsMachinery and industrial

products

Manufacturing

Trading

Machinery and industrial

products

Manufacturing

Trading

SubsidiariesSubsidiaries

LT InfotechLT InfotechLT IDPL

Infrastructure

LT-UIL

LT IDPL

Infrastructure

LT-UIL

Financial Services

LT Finance

LT Infra Finance

Financial Services

LT Finance

LT Infra FinanceManufacturing subsManufacturing subs

Foreign subsidiries

ME

China

Foreign subsidiries

ME

China

Source: Company

Engineering and construction

E&C is L&Ts core business, accounting for 75% of its standalone revenues. This business

is sub-divided into three operating divisions (ODs): engineering construction & contracts

(ECC), E&C projects and heavy engineering.

Engineering Construction & Contracts division (ECC)

ECC is one of the largest construction organisations in India. ECC undertakes projects on a

lump-sum turnkey basis. This involves engineering, design and the construction of infrastructure

and industrial projects covering civil, mechanical, electrical and instrumentation disciplines.The ECC division has been further divided into five business sectors:

Industrial projects and utilities (IPU): This unit focuses on thermal power, minerals &metals, bulk material handling and water supply. The unit is involved in engineering,

design and construction of facilities in these sectors. Planned investment in power,

metals and water supply sector is expected to be 2.13x, 5.6x and 3.12x,

respectively, in XI plan compared to X plan.

Building and factories (B&F): As the name suggests, this unit is involved ininstitutional & commercial buildings, system housing and industrial structures. There is

huge demand for office space by IT and ITES (Information Technology and EnabledServices) businesses, driving growth in this business segment. The company has

established offices in the UAE and Oman to capitalize on the potentially favorable

international business opportunities. Omans investment in its residential and

commercial real estate is estimated to be US$460 bn over the next five years

compared to US$230 bn in the past five years.


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Transportation Infrastructure (TI): All transportation projects such as roads, bridges,ports and airports fall under this unit. In the past few years, activity in this sector has

been strong, especially in the roads sector. Investment in roads in the XI plan is

estimated at INR3,118 bn, up 140% from the previous plan. Similarly, investment in

ports and airports in the XI plan is expected to be INR739 bn and INR347 bn,

respectively. This is an increase of 1,270% and 295% over the X plan, respectively.

Power transmission and distribution (PT&D): The division focuses on electricity T&Dsegment. We expect this segment to attract huge investment under grid strengthening

and rural electrification projects. It also focuses on railway business in view of

substantial growth initiatives in the railways, such as feeder route electrification and

dedicated freight corridors.

Hydro-electric (hydel) and nuclear sector (H&N): The opportunities in the hydelpower continue to be attractive with the Indian government placing greater emphasis

on hydel projects. About 16,000 MW of Hydel power capacities are being

planned in the XI Five year plan. With continuing progress in the Indo-US nuclearpower co-operation treaties, there are considerable expectations on the growth of

nuclear power in India and the unit expects to play a significant role in future nuclear

power projects.

Engineering & Construction Projects (E&CP)

The engineering & construction projects OD undertakes EPC (engineering, procurement &

construction) projects in select sectors, such as oil & gas, power and minerals. The

division has design centres in Mumbai, Baroda, Delhi and Abu Dhabi. It is also

strengthening its operations in the Middle East to tap new opportunities in new capacity

creation, clean fuel projects and downstream petrochemicals.

This OD takes up EPC projects and then procures components and subcontracts works to

the most efficient supplier. This subcontracting is not necessarily done within L&T. All

areas in which this SBU operates are seeing significant activity and the outlook is very

robust, in our view.

Hydrocarbon and Power (HC&P): Refineries and petrochemical complexes formpart of this unit. L&T is particularly strong in processes and offshore platforms. We

estimate planned investment in the Indian oil and gas space to be INR4,004 bn

over the next five years which 2.24x the investment in the last five years.


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Heavy Engineering Division (HED)

HED manufactures and supplies custom-engineered critical equipment and systems to

sectors like fertilizer, refinery, petrochemical, chemical, oil & gas, thermal & nuclear

power, aerospace, and equipment & systems for defence applications. It also plans to

start shipbuilding activities for the construction of special commercial vessels and

warships for the Indian navy and the coast guard.

The division has manufacturing and fabrication facilities located at Mumbai, Hazira and

Baroda (Gujarat) and Vishakhapatnam (Andhra Pradesh). It has also started construction

work for a precision manufacturing facility at Coimbatore in Tamilnadu, which will cater

to the needs of aerospace, aviation, nuclear power and sub-systems for defence.

According to the Ministry of defence, the defence sector is expected to be opened up for

private participation very soon. The process for granting Raksha Udyog Ratna (RUR)

status to selected technology players has been initiated. In addition, the offset policy is

expected to throw up significant opportunities for the division in the medium to long term.

High crude prices have renewed interest in gas and coal-based projects. This has

resulted in strong growth in this divisions exports. The Middle East, China and South

America are likely to be the major export markets.

Joint ventures

The key strength of L&Ts E&C business is its leadership in technology and engineering.

The company has continuously upgraded its technology in various areas by entering into

JVs with companies that are leaders in their areas of operation. The revenue and profit

contribution from these JVs is insignificant to the P&L, but they bring in skill sets that enableL&T to maintain its market leadership. L&Ts key joint ventures are:

L&T Chiyoda Ltd: This is a 50:50 JV with Chiyoda Corporation of Japan. The JVoffers IT-enabled services and engineering services to process industries such as

petroleum refineries, chemical & petrochemical units, fertilizer companies and oil &

gas firms. The company has a high-end engineering centre at Mumbai. The

company reported revenues of INR530 mn and net profit of INR78 mn in FY07 up

from INR342 mn and INR39 mn in FY06, respectively. Voith Paper Technology (India) Ltd: L&T and Voith Paper of Germany hold equal

stakes in this JV. The JV provides comprehensive technology solutions to the paper

industry, covering the entire production process from fiber to paper. The company

has become a supplier of choice to the paper industry for its technological

leadership. In FY07, the JV reported revenues of INR308 mn and net profit of

INR89 mn up from INR149 mn and INR32 mn in FY06, respectively.


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L&T Ramboll Consulting Engineers Ltd: L&T and Ramboll A/S of Denmark holdequal stakes in this JV. It offers engineering and project consultancy services for

transportation infrastructure projects in the civil engineering domain. The JV had sales

of INR164 mn and profit of INR29 mn in FY07 up from INR151 mn and INR10 mn

in FY06, respectively.

L&T Valdel Engineering Private Ltd: This a 50:50 joint venture between L&T andValdel Corporation Ltd. This JV provides the following services to process and well-

head platforms: a) front-end engineering & design (FEED); b) detailed engineering

services; c) procurement engineering services; d) project management services; and

e) the revamping of platforms and pipelines. The JV had sales of INR250 mn and

profit of INR40 mn in FY07 up from INR156 mn and INR32 mn in FY06,

respectively.

HPL Cogeneration Limited (HPLCL): A 51% subsidiary, it is a joint venture betweenL&T and Haldia Petrochemicals Limited, Kolkata, for operating a 116 MW

combined cycle cogeneration power plant at Haldia, West Bengal. The electric

power and steam generated by the plant are supplied exclusively to the

petrochemical complex of Haldia Petrochemicals Limited (HPL). The company had

sales of INR1,688 mn and profit of INR905 mn in FY07 compared to

INR1,714 mn and INR970 mn in FY06, respectively.

L&T-Sargent & Lundy Limited (LTSL): LTSL is a joint venture with Sargent & Lundy LLC(S&L), USA. It provides power plant engineering services to its parent companies as

well as to a few niche customers in India and abroad. The JV had sales of

INR229 mn and profit of INR12 mn in FY07 up from INR130 mn of revenue and a

INR46 mn loss in FY06.


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Figure 25: E&C JVs

Revenues(INR mn) PAT(INR mn) Margins(%) Growth YoY(%)FY06 FY07 FY06 FY07 FY06 FY07 Revenues PATL&T Chiyoda 342 530 39 78 11.4 14.7 55 100

Voith 149 308 32 89 21.5 28.9 107 178

L&T Ramboll 151 164 10 29 6.6 17.7 9 190

L&T Valdel 156 250 32 40 20.5 16.0 60 25

HPLCL 1,714 1,688 970 905 56.6 53.6 -2 -7

L&T Sargent & Lundy 130 229 -46 12 -35.4 5.2 76 NA


We expect L&Ts E&C order inflows to grow 2.4x during FY08-FY10 compared tothe past three years

We project E&C order inflow of INR1352 bn over FY08-10, which is 2.33x the order

inflow over FY05-07. We expect domestic E&C projects to add INR1,070 bn to L&Ts

order book over FY07-10 which is 2.27x the order inflow in the pervious three years.

The rise in order inflow is broadly in line with our expectations on the inflection in

industrial capex and infrastructure investments. Of the overall projected increase in order

inflows, we believe that around 83% would come from the E&C division.

Figure 26: E&C order inflows

INR bn FY04 FY05 FY06 FY07 FY08E FY09E FY10EDomestic E&C 98 114 151 206 268 349 453

Exports E&C 19 17 34 46 65 91 127

E&C Total 117 131 185 252 333 439 580

Others 16 18 39 54 70 89 113

Total 133 148 224 306 402 528 693% from E&C 87.7 88.1 82.6 82.5 82.7 83.2 83.7

% from domestic E&C 73.5 76.7 67.5 67.4 66.6 66.0 65.4



We expect L&Ts other divisions to show a significant pick-up in growth momentum in the

next three years, but we believe E&C would still remain the key business driver for the

company. We project a stable share of E&C business in L&Ts order inflows of around

82-84%. However, within E&C, as management starts focusing on the international

market, we expect the share of exports to rise, although not significantly, due to expectedhigh volumes in domestic business.


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Figure 27: Total order inflows and CAGR

INR bn CAGR (04-07) CAGR (07-10) Total (05-07) Total (08-10 ) InflectionDomestic E&C 28.1 30.0 471 1,070 2.27

Exports E&C 34.9 40.0 97 282 2.91

E&C Total 29.3 31.9 568 1,352 2.38

Others 48.2 28.2 110 271 2.46Total 31.9 31.3 678 1,623 2.39% from E&C 83.8 83.3

% from domestic E&C 69.5 65.9



We project that the next three years will see similar growth to that achieved in the

previous three years, and as mentioned, exports should show a further pick-up, with an

FY07-FY10E CAGR of 40%, compared to annualized growth of 35% in the previous

three years.

Order book coverage to remain around 3x

The order book coverage ratio reached an inflection point in December 2006 as

depicted in the following chart. The order book coverage ratio currently stands at 3.67.

We expect the order book coverage to remain above 3 over the next two years.

Figure 28: E&C order book coverage ratio

1.81.6 1.5 1.5 1.5 1.6

1.9 1.92.2

2.3

2.7 2.6

3.7

3.0 3.1 3.0

0

1

2

3

4

Jun-04

Sep-04

Dec-04

Mar-05

Jun-05

Sep-05

Dec-05

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

FY08E

FY09E

FY10E

(x)


We expect a revenue CAGR of 34% over FY07-FY10E

We expect domestic E&C revenues to grow at 34% p.a. over FY07-10. We are

building in a drop in execution rate from 54.3% in FY07 to 45.1% in FY10. Execution

rate is defined as current year sales as percentage of start of the year order book.


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Figure 29: E&C revenue projections

INR bn FY07 FY08E FY09E FY10E CAGR (%)Domestic E&C 108 143 186 258 33.7

Exports E&C 24 28 46 69 42.4

Total E&C 131 171 232 326 35.4Total 176 229 307 421 33.6Source: Company data, Lehman Brothers estimates

The domestic E&C business is expected to grow its revenues at a CAGR of 33.7% over

FY07-FY10, while we project exports to show a much higher annualized growth rate of

42.4% over the next three years.

Solid expansion in margins

The following chart depicts the expansion in the E&C EBITDA margin since September

FY06. Given the seasonality in margins, we have clubbed similar quarters together in the

chart. The margin improvements were on account of a favorable business environment as

new orders came in at higher margins, operating leverage and corporate initiatives

started in FY06 such as cost control and global sourcing. The full impact of the

initiatives and favorable business environment was realized in FY07. The business

environment is expected to remain robust. However, the delta in margins realized in

FY07 is unlikely to be repeated, in our view. We expect only a marginal improvement in

EBITDA from here on.

Figure 30: E&C EBITDA margins

7.16.36.5

5.3

6.65.9

3.9

5.64.8

6.0

7.98.4 8.6

9.6

6.6

11.1

11.711.7

11.8

14.7

11.4

0

5

10

15

June Sept Dec Mar

FY03 FY04 FY05 FY06 FY07 FY08

(%)



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Electrical & Electronics (E&E)

L&Ts E&E division makes low-tension switchgears, air circuit breakers, molded case

circuit breakers, switchboards and electronic control systems. The division also makes

petrol dispensing stations and energy meters. Around 66% of this segments revenues

come from switchgear products and it is expected to remain the key driver for future

growth in business. According to the company, it holds a market share of 35% in theIndian low voltage switch gear segment. The company is now planning to move into

medium voltage segment. One of the key strengths of L&T is its very strong distribution

network. It has 500 authorized stockists, one of the largest networks in the country for

switch gears. The division is also investing in innovation and new product development.

Almost a quarter of FY07 sales came from products developed in the past five years.

Significant contribution to revenues and EBITDA, good margins

The division contributed 10% of L&Ts revenues and 14% of its EBITDA in FY07 (down

from 10.3% and 17%, respectively, in FY06). It also improved its EBITDA margins from

16.7% in FY06 to 17.3% in FY07.

Figure 31: E&E EBITDA margins

13.7

16.7 17.3

0

5

10

15

20

FY05 FY06 FY07

(%)


Robust outlook: we expect a 33% revenue CAGR over FY07-FY10

Figure 32: E&E revenue outlook

INR bn FY05 FY06 FY07 FY08E FY09E FY10E Total (05-07) Total (08-10)Domestic Electrical 10 12 17 23 29 38 39 90

Exports Electrical 1 1 2 2 3 4 4 9

Total Electrical 11 14 18 25 32 42 43 99Total 131 148 176 229 307 421 455 956% to Total 8.1 9.4 10.5 10.9 10.6 10.0 9.4 10.4



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Given the huge outlay planned in real estate development (particularly housing) and

power, this business should see robust growth in the medium term. The current growth in

commercial and residential complexes, malls, IT parks, hospitals and stadiums, etc., has

increased demand for E&E products. The governments thrust on the power sector through

the Accelerated Power Development and Reforms Programme (APDRP) and rural

electrification schemes represent a significant revenue opportunity for this division, in our

view. Outside of India, Chinas strong economic growth has boosted demand forproducts offered by the industry. Countries in the Middle East are also making large

investments in the development of infrastructure, power, desalination plants, refineries

and other areas.

We project the segments revenue CAGR of 33% over FY07-FY10. Also, the contribution

of the segment to total revenues is expected to remain around 10% (revenues over the

next year are expected to double from INR455 bn over the last three years FY05-FY07).

Fits into L&Ts long-term strategy

The business augments L&Ts capabilities in the industrial sector, and also fits in with the

companys long-term objective to increase the contribution of manufacturing to its overall

revenues. The company is expanding its capacity at the Ahmednagar plant, and

constructing a new one at Coimbatore. It is also expanding its product portfolio; its

acquisition of Datar Switchgear Ltd last year is one move in this direction (the activities of

Datar have been fully integrated after completion of acquisition process). The acquisition

adds products such as miniature circuit breakers and earth leakage circuit breakers to

L&Ts portfolio.

Increasing international presence

In order to increase its international presence in this segment, L&T recently set up a

manufacturing facility for high-end air circuit breakers in China. It has also entered into ajoint venture with Kanoo Group of Saudi Arabia to manufacture switchboards and motor

control centres in that country.

Machinery and Industrial Products (MIP)

Machinery and Industrial Products Division (MIPD) is organized into three main business

sectors: 1) construction equipment business, 2) industrial products and 3) industrial

machinery.

The division is involved in manufacturing, trading and servicing. Trading and servicing

accounts for 70% of the segments revenues (FY07). This division was created with a

view to consolidate L&Ts construction and mining equipment businesses. The divisionmarkets and provides support for construction and mining equipment, valves, plastic

processing machinery, and welding products. These products are made by L&Ts 50%-

owned JVs listed below. Most of these associates would take care of the manufacturing

part, and L&T normally does the sales servicing and marketing of the products. (except in

L&T case and Tractor JV where marketing is done by the JV itself)


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Figure 33: JV performance

Revenues (INR mn) PAT (INR mn) Margins (%) Growth YoY (%)FY06 FY07 FY06 FY07 FY06 FY07 Revenues PATL&T Komatsu 5,350 8,060 401 584 7.5 7.2 51 46

Audco 5,790 6,890 432 523 7.5 7.6 19 21

L&T Demag 1,120 1,400 29 32 2.6 2.3 25 12

EWAC Alloys 741 1,090 145 226 19.6 20.7 47 56

L&T case equipment 1,770 3,240 9 145 0.5 4.5 83 1606

Tractors Engineers Limited 769 1,030 54 133 7.0 12.9 34 146

Source: Company

Figure 34: Manufacturing JV subsidiaries and associates

JV JV partner

L&T Komatsu Komatsu, Singapore Hydraulic excavators and components.

Audco India Limited Flowserve group, USA Industrial valves, safety systems and pneumatic actuators

L&T-Demag Demag Ergotech, Germany Injection molding machines for plastic industry

EWAC Alloys Eutectic and Castolin group Electrodes, welding wires, wear plates and welding equipmentL&T Case Equipment CNH American LLC Earthmoving equipment such as loader backhoes and vibratory compactors

Source: Company

L&T Komatsu: JV with Komatsu Singapore. The company manufactures hydraulicexcavators and other associated components. The JV had sales of INR8.06 bn and

profit of INR584 mn in FY07 up from INR5.35 bn revenues and INR401 mn PAT in

FY06. The outlook for this JV remains robust, in our view, with the introduction of new

products and strong outlook on mining and construction business.

Audco India Limited: It is L&Ts JV with Flowserve group which manufactures industrialvalves, safety systems and pneumatic actuators. The company has significant presence

in the international market, with more than half of revenues coming from exports. It

recorded sales of INR6.89 bn in FY07, a YoY growth of 19%. Profit at INR523 mn,

increased by 21% YoY. We expect growth to be sustained over the medium term,

driven by robust activity in oil & gas and plans of the Flowserve group to increase its

outsourcing in EU and US.

L&T-Demag: JV with Demag Ergotech of Germany manufacturing injection moldingmachines for plastic industry. The applications for these products span automobiles,

electrical goods, packaging and personal goods industry. In FY07, revenues wereINR1.40 bn up from INR1.12 bn in FY06 and profit after tax was INR32.4 mn as

compared to INR29.0 mn in FY06. The company expects demand from

manufacturing to shift to low-cost geographies like India.


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36 October 16, 2007

Figure 35: MIP EBITDA margins

11.9

14.7

18.0

0

5

10

15

20

FY05 FY06 FY07

(%)


Expect revenue growth of 33% over FY07-FY10

Figure 36: MIP revenue projections

INR bn FY06 FY07 FY08E FY09E FY10E Total (06-07) Total (08-09)Domestic MIP 11 13 16 19 23 24 35

Exports MIP 4 5 6 8 10 8 14

Total MIP 14 18 22 27 33 32 49Total 148 176 229 307 421 324 536% to Total 9.7 10.2 9.6 8.8 7.9 10.0 9.2


We expect the revenue contribution of this segment to be around INR536 bn as

compared to INR324 bn in the past two years, but as a percentage contribution of total

revenue stream, we expect it to come down marginally from the current 10% to around

9% in the next three years on the back of strong E&C segment growth. Capacity

additions in steel & cement should result in increased privatized mining. Demand for such

equipment is expected to mimic investment in industrial capex and infrastructure, in our

view.

Larsen & Toubro Infotech

Focus on manufacturing and engineering-related industries

L&T Infotech is a fully owned subsidiary of L&T. L&T had revenues of US$320 mn on a

standalone and US$360 mn on consolidated basis (FY07). L&T InfoTechs serviceoffering includes that of a typical IT service provider, including application development

and maintenance, ERP, data warehousing, business intelligence, high-end KPO/BPO,

testing and infrastructure management services. However, in terms of verticals, the focus

is more on manufacturing and engineering-related industries.


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Figure 37: L&T Infotech vertical wise revenues FY07

Manufacturing,

(0.32)

Others, (0.01)

Product Engineering

Services, (0.17)

Insurance, (0.23)

Banking and FS,

(0.10)

Energy and

petrochemicals,

(0.17)


Strong growth in revenues

L&T Infotechs revenues have grown at an annualised rate of 52% over the period FY04-

FY07. Manpower increased from 2,491 in FY04 to 7,383 as of June 2007. Employee

productivity, which we define as revenues per average employee is at INR1.88 mn/

employee, in line with other top-tier IT companies. Exports accounted for 97% of the

companys revenues, with the US contributing 73% of revenues (FY07). Offshore

development centers accounted for 43% of the companys exports.

Improving profitability

Profitability has also improved significantly. The company recorded a net margin of

11.6% in FY07, which is lower than the margins of other mid-tier IT services companies,but a substantial improvement over its own margin of 8.8% in FY06. However, with

appreciation of the rupee against the US dollar, we do not expect significant margin

expansion FY08. In fact, in Q1FY08, PAT margins were 11.85%, a drop of 65 bps

YoY. We expect margins to be in the range of 12-12.5% over the next couple of years.

The RoE of the business has increased from 39% in FY05 to 44.5% in FY07. The rise in

profitability is despite the fall in leverage. Net debt to equity is down to 0.17 from 0.66

in FY05.


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Outlook: Revenue growth likely to remain strong

Figure 38: Revenue projections L&T Infotech

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

FY05 FY06 FY07 FY08E FY09E FY10E

3

6

9

12

15

Revenues Margins(INR mn) (%)


We expect growth momentum to continue, and project an annualized revenue increaseof 35% over FY07-FY10 in rupee terms. Any appreciation of the rupee would negate the

positive impact of operating leverage. We expect net margins to remain compressed;

however the company expects margins to be higher because of improved resource

utilization. L&T Infotechs resource utilization is currently at 66% compared to the industry

average of 75%.

L&T has of late renewed its focus on the IT business, and set a revenue target of US$1

bn by FY10. The increase in headcount, from 2,491 as at end-FY04 to 7,383 as at

end-June 2007, reflects managements confidence in this companys prospects. The

company is also open to inorganic growth opportunities. In fact, L&T Infotech recentlyacquired GDA Technologies, of the US for US$27 mn. GDA Technologies had revenues

of INR921 mn in FY07.

L&Ts management has indicated that it will float an IPO of L&T Infotech some time in

second half of 2008. This should lead to value unlocking for this subsidiary.

L&T Finance (LTF)

LTF, a wholly owned subsidiary of L&T, is a non-banking finance company (NBFC),

offering a wide range of financial products, such as like financial lease, operating lease,

hire purchase, term loans, bills discounting, etc. to cater to varied needs of customers.

The main driver of growth in this business is construction equipment finance, which is

slated to grow over 20% over the next three years. With huge spending in roads, ports,

irrigation, mining and housing sectors coming up, coupled with increasing demand from

the parent company businesses and capital expenditure by corporates, the segment is

expected to grow at more than 50% p.a. for the coming three years.


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LTF has also been able to gain a significant market share in the commercial vehicles

segment and has extended its tractor finance products to cover tractors and farm

implements of all leading original equipment manufacturers. It is also keen on expanding

into rural markets which will cater to additional opportunities.

Strong growth

LTF registered significant growth in disbursements across its key business segments such

as corporate finance, construction equipment finance, tractor finance and commercial

vehicle finance last year The segments revenues grew by 85% from INR1.49 bn in

FY06 to INR2.75 bn in FY07. Profits also increased by 78% to INR626 mn this year

from INR351 mn last year.

Figure 39: L&T Finance performance Figure 40: L&T Finance Asset size

110

149.1

275.4

2435.1

62.6

0

75

150

225

300

2004-05 2005-06 2006-07

Income PAT(INR crores)

2922

1345.7

853.3

0

1,000

2,000

3,000

2004-052005-062006-07

(INR crores)

Source: Company data Source: Company data

L&T IDPL

L&T IDPL is the holding company for all of L&Ts BOT projects. Going ahead, all of the

BOT projects being executed by L&T except power projects would be housed in L&T

IDPL. IDPLs portfolio currently comprises projects in the roads, ports and airport sectors.

L&T currently holds 78.4% of L&T IDPL. The remaining 21.6% is held by private equity

investors JP Morgan Chase and IDFC.

L&T-IDPL in turn hold stakes in SPV (Special purpose Vehicles) that house infrastructure

projects and L&T Urban infrastructure. Each SPV houses one infrastructure project.

Currently, L&T-IDPL holds stakes in 18 SPVs that house infrastructure projects. In ten ofthese SPVs, L&T IDPL holds a majority stake (>=50%). Most of the investments so far have

been in the road sector. L&T- Urban Infrastructure Ltd (L&T-UIL) was formed in March

2006 and houses all real estate projects. L&T IDPL holds a 75% of stake in L&T-UIL, with

the remaining being held by the strategic partner HDFC.


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Many of the BOT projects are expected to be operational by end 2009

Of the 33 entities (Infra SPVs and projects under L&T-UIL), 14 are already operational.

The remaining are under implementation. Many of these BOTs are expected to be

operational by end 2009. Once the projects are commissioned and cash flows start

accruing the valuations are expected to rise significantly as risk drops, in our view.

L&T IDPL intends to hold majority stake in the projects

As a policy, L&T-IDPL intends to hold majority stakes in most of the projects. The projects

in which it currently has a minority stake, it either intends to exit or acquire additional

stake to attain majority. Recently L&T-IDPL exited from some projects- Jaipur Kishangar

Expressway Limited, Gujarat Toll Road Investment Company Ltd and Vishakhapatnam

Industrial Water Supply Company Ltd where it held minority stakes.

INR4-5 bn equity investment by L&T-IDPL every year over next three years

L&T-IDPL intends to invest INR 4-5 bn as equity in various infrastructure and real estate

projects. The equity may be invested by the current PE investors in L&T-IDPL so that theshareholding structure of L&T-IDPL remains unchanged.

As per the recent consultation paper from the planning commission, the private investment

in infrastructure other than power is estimated at INR1278 bn over the next three years.

Assuming a debt:equity of 80:20, equity investment shall be INR256 bn. LTIDPLs equity

investment of INR12 bn (INR4 bn every year in infrastructure other than power over next

three years) over next three years represents a market share of only 4.7%. Therefore, we

believe that there exists potential upside to the investment by L&T-IDPL in the infrastructure

projects.

Benchmark equity IRR of 18%

For all projects where L&T-IDPL takes the traffic risk, the benchmark equity IRR of

investment in the projects is 18%. For urban infrastructure projects, the company is

targeting higher returns in excess of 22%. The potential returns are greatest in airport

and ports. In airports, equity returns can be as high as 25-30%. In ports, the returns are

in the range of 18-22%. Projects in roads, electricity transmission and railways entail

lower equity IRR, in our view.


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International Operations

Currently 18% of the revenues come from international operations. The focus regions for L&T

in export market are the Middle East and China. In the Middle East, the company intends

to participate in the investment boom in the region. Based on the upcoming projects in the

Middle East, MEED project estimates that the overall investment in oil and gas,

petrochemicals, power, industry and construction shall be more than US$1 tn over the nextsix years. The Middle East currently accounts for almost half of the companys international

revenues. L&T has set up a design center in Sharjah to cater to the requirements of the

region.

China is being looked at both as a market and sourcing and global manufacturing hub.

L&T has set up a manufacturing plant in China Wuxi Electric Company for the

manufacture of switch gear products; an industrial valve manufacturing company in

Jiangsu and Rubber Machinery Company in Qingdao. There is a three-pronged strategy

for the China market: a) compete directly to compete directly in the Chinese market

with its own pro

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