We recently met the management of Larsen and Toubro (L&T). The management is confident of securing the target order inflows for the current fiscal.

The management indicated that order pipeline visibility beyond twelve months has become slightly hazy given firm interest scenario, high commodity prices and global credit squeeze.

Thus, there could be a period of uncertainty beyond FY09 if macro and global economic indicators do not improve.

New industry verticals like Railways, Power Generation and Defence should make meaningful contribution from FY11 onwards.

However, the outlook for Middle East market continues to be positive and the company expects to increase its market share there.

On the subsidiary front, L&T Infotech faces headwinds from the credit turmoil in the US. The finance subsidiary L&T Finance’s business slowed down due to firming up of interest rates.

We see market for infrastructure projects slowing down but believe L&T should be in a position to gain market share.

Valuation

At the current price, L&T is trading at 22.9x and 18.2x FY09 and FY10 earnings respectively.

The stock commands a premium due to its superior execution capabilities and ability to enter new industry verticals like power generation, ship building and defence. The company has invested in several large infrastructure projects like ports (Dhamra and Kakinada port), roads and highways and real estate ventures.

There exists significant value unlocking potential in these ventures. Consolidated earnings are expected to grow at a CAGR of 29% between FY08-10.

We value the company based on SOTP with a target price of Rs3,354 (Rs3,400 earlier). Our revised target price is lower due to contraction in valuation multiple of infotech and finance subsidiaries. Also the investment value of L&T’s stake in Ultratech Cemco has reduced in market value.