Schneider’s L&T Acquisition is seen in positive light due to New Business Avenues

Analysts are scrutinizing the merger of the two electric and home automation giants, Larsen & Toubro and Schneider Electric. The deal signed between the two organizations mentions the acquisition of L&T’s E&A business.

With time, the E&A business has fostered strong R&D capacities and has a broad network of channel partners across International as well as Indian markets. The E&A vertical showed a net revenue of ₹5,038 crore during FY16-17.

L&T’s E&A business has been performing for decades now and is well-placed to continue its growth with brilliant technology, people and global presence. The newly forged partnership with Schneider Electric, which has a solid product and geographic presence, will further elevate the business prospects for their E&A business & its employees. According to Santosh Yellappu, analyst from India Nivesh, the deal valuations are fair and the company is following its objective of becoming “asset-light”. The vertical reported a net revenue of Rs 50.38 billion (about five per cent of total) during FY16-17, with EBITDA margins of approx. 15%. Therefore, the deal is valued at around 2.8x the E&A business’ revenue and 6.6x its EBITDA.

Morgan Stanley says, the value works out to be 17 times of the enterprise’s value (EV)/EBITDA and 31x earnings for FY19. “L&T stock trades at 24x estimated EPS for FY19 based on consensus earnings. We view the deal positively from a sentiment perspective as it reiterates L&T's resolve in unlocking value while continuing to dominate EPC space,” it said.

Credit Suisse, too, shares a similar view. “(Sale is) strategically positive as the business is non-core with technology risk. Cash usage would be key. Valuation is value neutral versus our target price.”

However, the acquisition has a provisional impact on the market. Owing to the fact that profit margins in E&A business are higher than L&T’s Ebitda margins (excluding services) by 9-10%, the sale is likely to impact the cumulative number now, when the deal is signed. However, the impact will be settled over time with a new sustained model coming up.

G Chokkalingam, founder and managing director, Equinomics Research and Advisory, says, the divestment will accrue positives and will lead to significant cash flows at a time when economy is expected to pick up and will drive L&T’s growth to the next level too.

Even before this deal, analysts were positive on L&T due to its improving order execution and order flows. Edelweiss, for instance, expects a gradual, but broader recovery in domestic market for L&T during the March 2018 quarter, as was seen in Q3FY18 and the first nine-months of FY18 which saw core infrastructure execution growth of 20% and 15%, respectively. The L&T’s stock has been on an uptrend, outperforming the Sensex since December last year. Currently, at Rs 1,400.60, it is not far from its all-time high of Rs 1,469.60 seen in early February.
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Last updated:11/22/2018 3:55:18 AM
Erric Ravi

Erric Ravi

Erric Ravi is an entrepreneur, speaker & the founder of Storify News and Recent News He is the Co-Founder of The Storify News Times. Forbes calls him a top influencer of Chief Marketing Officers and the world’s top social marketing talent. Entrepreneur lists him among 50 online marketing influencers to watch. Inc.com has him on the list of 20 digital marketing experts to follow on Twitter. Oanalytica named him #1 Global Content Marketing Influencer. BizHUMM ranks him as the world’s #1 business b

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