The relative movement in market capitalization of L&T and its subsidiaries over the past few months and inexpensive valuations of its core E&C business would suggest that the market is sceptical of value-creation in the E&C business of L&T and value-unlocking from L&Ts subsidiaries despite a significant increase in their market capitalisation over the past 12 months, Kotak Institutional Equities said in a report.
"The former is probably not correct since the market is very excited about the prospects of a multi-year investment cycle in India and LT is well-positioned to participate in the same. The latter may require restructuring LT's conglomerate structure," it said.
"In our view, LT's valuation does not adequately capture a potential multi-year investment cycle and LT's unique position in a large market opportunity."
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"We see no reason for LT's holding company discount to be at such high levels, especially as its main subsidiary businesses are either doing remarkably well such as LTITL, LTTS, MTCL (its three IT services companies) or are likely to recover from the negative impact of the Covid-19 pandemic such as LTHF (financial services entity).
"The market may be sceptical about value-unlocking despite large value creation in the subsidiaries in the past 12-18 months," the report said.
Our reverse 'market-cap' exercises show that the implied market capitalization of the E&C business of L&T has significantly trailed the growth in market capitalization of its subsidiaries.
