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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