L & T

Broker:  BNP Paribas

Target Price: Rs 1,118

Report: We visited the heavy engineering division (HED) Powai facility of the company. Process plant equipment for coal gasifiers, oil refineries, cracker plants and fertilizer plants are manufactured here.

The Powai facility contributes 40% of HED revenue and the Hazira facility contributes the remainder.

There is upside risk to our estimates due to a potential pick-up in fertilizer
plant equipment orders. We also visited the electrical business group (EBG) facility located in the vicinity. The facility manufactures low voltage switchgears that are used in all types of electrical facilities (factories, substations, power plants).

Our on-the-ground observations support our low 7.5% FY09 revenue growth estimate for this segment. Capacity can be doubled by operating two shifts and is not a constraint. Workers at the facility require only 4-5 days of training.

The facility has increased capacity by moving to a workstation-oriented assembly line; earlier, a single worker worked on each unit from start to finish.

Our DCF valuation for the standalone company results in a Rs 946 contribution to our Rs 1,118 target price; assumptions include a WACC of 14% implying a 19.8x FY10 EPS. Subsidiaries contribute Rs 172 to our target price.

Closing price on Monday, November 10, 2008: Rs 922