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Larsen & Toubro
Price target revised to Rs1,030
Company details Price target: Market cap: 52 week high/low: NSE volume: (no. of shares) BSE code: NSE code: Sharekhan code: Free float: (no. of shares) Rs1,030 Rs76,802 cr Rs1,147/678 20.9 lakh 500510 LT LT 92.3 cr
We recently met the management of Larsen & Toubro (L&T) to discuss the growth prospects and challenges ahead. Further, we touched upon critical aspects of its key subsidiaries and the measures planned by the company to improve the return ratio. Key takeaways from the meeting are as follows: Revenue guidance maintained; confident on strong order inflow: The management of L&T reiterated its guidance of a 20% year-on-year (Y-o-Y) growth in the order inflow and a 15% growth in the revenues for FY2014. An order inflow of Rs46,000 crore in the year till date (YTD) FY2014 (Rs88,000 crore in FY2013), a healthy pipeline of L1 bids and traction in its international operations give the management the confidence to achieve the stated guidance. The current order book stands above Rs175,000 crore (ie 2.8x FY2013 stand-alone net sales). Commentary sounded cautious on margin front: Though the company is poised to deliver a healthy revenue growth, but the management sounded cautious on the margin front. We believe the prevalent tough economic conditions would certainly reflect on L&T’s margin. Hence, we have built in softness in the company’s margin estimate. We have fine-tuned our margin estimate—we expect the operating profit margin (OPM) to drop by 90 basis points (Y-o-Y) in FY2014. Measures to improve return ratio; aims to raise RoE to 20% in next four years: The management has set an ambitious target of improving the consolidated return on equity (RoE) by 400 basis points to over 20% in the next four years. In addition to better working capital management, the management aims to limit the capital expenditure (capex) in the stand-alone entity and investments in its subsidiaries. Plans to rope in equity investors in development projects and to monetise assets: The management is also looking at monetising assets and unlocking value in some of the subsidiaries like Infrastructure Development Projects Ltd
Valuations (stand-alone) Particulars FY2011 43,904.9 19 12.8 3,404.4 36.9 12.4 22.5 3.5 10.7 20.9 17.0 FY2012 53,170.5 21 11.8 4,259.2 46.1 25.1 17.9 3.0 9.9 19.1 18.1 FY2013 60,873.3 14 10.5 4,663.1 50.5 9.5 16.4 2.6 8.8 18.5 17.2 FY2014E 69,711.3 15 9.6 4,800.4 52.0 2.9 15.9 2.3 8.0 17.3 14.6 FY2015E 77,170.7 11 9.6 5,318.8 57.6 10.8 14.4 2.1 7.5 18.2 15.3
Foreign 16% Others 47% DIIs 37%
1200 1100 1000 900 800 700 600 Mar-13 Sep-12 Jun-13 Sep-13 Dec-12
Net sales (Rs cr) Growth YoY (%) OPM (%) Adj. net profit (Rs cr) Adj EPS (Rs) Growth YoY (%) PER (x) P/B (x) EV/EBIDTA (x) RoCE (%) RoNW (%)
Price performance (%) 1m 3m 6m 12m
Absolute 11.9 Relative to Sensex
-7.0 -10.0 -20.2
3.9 -14.0 -16.4 -26.4
September 25, 2013
0 2.600 crore in the next few years. Further. the company has a sizeable stake. During our interaction with the management.250 crore and a contract for the western freight corridor worth Rs6. Though the order inflows are on track to sustain a decent growth in the revenues.8 2. Moreover. Dhamra Port and Hyderabad Metro Project. Hence. the company has already announced an order inflow of around Rs46.000 200.000 crore (ie 2.7 2. Hence. Order book and book-to-bill trend 250. View and valuation: fine-tuned earnings. Buy retained: L&T is better placed than its peers to weather the economic slowdown due to its wide range of businesses. but the company is facing pressure on the margin. On the subsidiary side. 2013 Home Next .463.5 2 1. We retain our positive stance on the stock with a revised price target of Rs1. Moreover.800. which will reduce further funding from the parent company.340. Also.000 50.8x FY2013 stand-alone net sales) as of now.164.000 crore during the year and YTD FY2014. the scope of work involves entire engineering.000 150.6 2. We learned from the management that there are several projects the company is having L1 position and based on that they are fairly confident of achieving the order inflow target in FY2014.738. low leverage and comfortable liquidity) also helps L&T to prequalify for the large-size projects.9 2.2 Major orders won recently Among the recent orders won by L&T. In an environment where the overall order inflow is weak.6 4.7 Per share 806.5 52. procurement and construction (EPC) work too. the significant balance sheet strength (high net worth.1 73. the finance and information technology (IT) businesses would continue to do well and any development in terms of monetisation of some of its assets would act as a positive trigger.4 2.7 Sharekhan 3 September 25. Credibility and balance sheet strength help to stand out in the crowd We believe while the down turn has impacted the sector across the board. we have trimmed down our margin estimates and consequently fine-tuned our earnings estimates for FY2014 and FY2015.000 crore.000 100. The current order book stands above Rs175. In the western freight corridor project. they reiterated the order inflow growth guidance of 20% year on year (YoY) in FY2014.030 Remarks At 14x FY2015E estimates Value (Rs cr) 74. the management is also looking for an opportunity to monetise some of the assets like Dhamra Port (L&T’s 50:50 joint venture with Tata Steel. the metro train project in Riyadh worth Rs8.3 2.5x FY2013 book value At 20% discount to equity invested 30% discount to book value 30% discount to book value 6.030. superior track record and a strong overseas presence.8 7710.5 2.7 110 95.0 83.000 FY10 FY11 FY12 FY13 FY14E FY15E Book to bill (x) Order Book 3.700 crore (in a consortium led by the Japanese company Sojitz) were huge in size.6% stake IDPL Other subsidiaries Associates and others Fair value At 12x FY2013 earnings At 1. where the company has applied for a clearance to enhance capacity) and Hyderabad Metro Project (execution is on track). IDPL needs an additional equity investment of around Rs4. L&T could withstand it being in a relatively advantageous position. L&T aims an order inflow of around Rs106. Maintains healthy sales guidance on strong order inflow L&T exhibited a healthy order inflow since the beginning of FY2014. which gives a very healthy revenue visibility. we believe the long standing credibility and a superior execution track record make it a preferred choice for many clients.0 14.investor’s eye stock update (IDPL).0 1. As per the current portfolio. we SoTP Particulars L&T’s core business Subsidiaries L&T Infotech L&T Finance Holdings--82. the main execution responsibility is with L&T only.
000 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Infra segment getting significant traction We learned from management that the infra space is getting a significant traction. electrical and plumbing and finishing works To construct residential tower EPC order for Yibal-Natih gas reservoir in Oman For 400kV double-circuit quad line Supply of cracking furnace modules and supply of equipment and EPC work From various clients From various ongoing projects From NCL for EPC work of coal handling package Region India India India Abu Dhabi Abu Dhabi India India Saudi Arabia India India India India India India Oman Saudi Arabia India India India Oman India India India India India Amount (in Rs cr) 1. In between.700 1. orders from the infra segment were 62% of the total order inflow announced by the company. mechanical.097 1. 2013 Order inflow Sharekhan Home Next . 4 September 25.000 25.125 550 Source: BSE. A high powered expert committee (HPEC) proposed around Rs8 lakh crore over the next 20 years in the water and water-related areas. Similarly. The management of L&T expects an order worth Rs5. the hydrocarbon segment is expected to remain decent. water and renewable energy space.319 1. the management shared that while the order inflow from the urban infra and real estate is showing positive signs.740 528 806 6.070 1.000 15.071 807 1. Order inflow trend (quarterly) 30.000 5.250 974 735 2. Company & Sharekhan Research appreciate the fact that due to a diversified presence across several sectors.500 1.085 8. mainly the transport.987 628 1. but now the same is being compensated by a higher inflow from the infrastructure (infra) segment. In the last six months.000 crore annually from water and water-related areas. L&T has managed well to sustain its overall order inflow. We believe it is the most under-spent sector and could attract huge investments in the coming years. Also. orders from the water segment (14% of the total order inflow announced during the first half of FY2014) are also getting traction.021 866 1. structural.141 1.986 1.investor’s eye stock update Major orders above Rs500 crore announced by L&T in FY2014 (YTD) Segment Infra Power—T&D Infra Infra Infra Infra Infra Infra Infra E&C—solar Infra Infra Infra—water Infra Infra Infra Power—T&D Infra—water Infra Infra Power—cable Hydrocarbons Infra—water Infra—water Power—CHP Scope of work Construction of residential tower For execution of R-APDRP project on turnkey basis Construction of residential tower in southern part of India Construction of airport Construction of road project Construction of office building Project for elevated viaduct and elevated station An infrastructure contract Construction of office building Order for solar photovoltaic power plant in Tamil Nadu Construction of Western Dedicated Freight Corridor Project Construction of office building Major order from water resource department To construct a paraxylene plant for a leading refinery in India To build Batinah road project (package 4) in the north-west of Oman Construction and commissioning of a metro project in Riyadh. Few years back. They believe the urban infra work will continue to get a decent order inflow in the coming days.509 750 1.000 20.000 10. Saudi Arabia A major turnkey order for various rural electrification work Scope includes civil. which has dried down in recent times. the power segment seems to be very tepid. the order inflow from the power segment was flowing significantly.000 2.
the international order inflow was around 13% of the total inflow. Effectively. but a profitable earnings growth could be maintained by the company.0 8.0% 15.0% 14.0% 13. it needs to focus on the following points: Maintain healthy revenue and earnings growth of stand-alone entity: The parent company is the major revenue and profit contributor and the prime cash generator. which the management expects to increase to around 22% in FY2014 on a rising total order book base. from our interaction with management we believe that the margin could witness a marginal contraction in FY2014. During YTD FY2014. Hence. given the current environment. We believe the tough economic conditions would certainly reflect on L&T’s margin. the management expects the international orders to double in FY2014 (YoY) in absolute terms. Keeping working capital under control: The net working capital (NWC) of L&T was around 20% in FY2013 and the management aims to keep it within a range of 15-20% of sales in the future. During FY2013. Though a margin pressure is expected. while the domestic order inflow is weak.0% FY10 FY11 FY12 FY13 FY14E FY15E Operating margin (%) Efforts to improve return ratio The management of L&T aims to improve the RoE of the consolidated entity in the next four years to 20% from the current level of 16%. the international order inflow indicates an improving trend with as high as 34% of the total order inflow announced by the company. Management commentary suggests softness to remain in margin L&T’s management didn’t give any guidance on the margin.0% 9.0% 12. Sharekhan 5 September 25. the management needs to maintain a healthy revenue growth backed by a strong order inflow.0 6.investor’s eye stock update Order book break-up sector wise 100% 80% 60% 40% 20% 0% FY10 FY11 FY12 Infra. they expect the engineering and construction (E&C) division to notch an OPM of 11-11.0 12.0% 11. Nevertheless. The E&C segment is likely to retain its lion’s share of contribution. Managing receivable should be the main aim to attain this target as the receivable days have moved up recently from 100 days in FY2011 to 129 days in FY2012 and 136 days in FY2013. 2013 Home Next .5%. Pow er Hydrocarbons FY13 Q1FY14 Process Others OPM trend (quarterly) 16. Based on this the management believes that on an annual basis.0 10. the company could maintain a double-digit OPM.5%. We believe the company is well equipped to achieve the same.0% 8. mainly with significant order inflow expectations from the Middle East. we believe the earnings would grow.0% 10. The revenue and profit before interest and tax (PBIT) contribution from the E&C segment remains above 80% of the total revenues and PBIT of L&T. though during Q1FY2014 the OPM was around 8. However. the management aims to enhance its focus to win higher share of international orders. We learned from the management that to attain the same.0 14. Stand-alone OPM (annual trend) 16.0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 OPM(% ) International orders likely to gain mass In the current environment. The management reiterated that the quarterly margin fluctuation could be due to multiple factors but on an annual basis the margin should get normalised.
0 112.0 818.3 238.0 Source: Company & Sharekhan Research Net w orking cycle Going forward.2 389. Investment in subsidiaries Particulars FY12 (Rs cr) FY13 Increase (Decrease) YoY 134. However. which will reduce further funding from the parent (A) Investment in subsidiaries Larsen & Toubro Infotech L&T Shipbuilding L&T Finance Holdings L&T General Insurance Company L&T Infrastructure Development Projects L&T Power Development L&T Special Steels and Heavy Forgings L&T-MHI Boilers L&T-MHI Turbine Generators (B) Major investment in subsidiaries (C) Investment in other subsidiaries (E) Investment in associate. from which majority of the funds were invested in ship building.5 301.6 119. So it needs around Rs3.000-9. BTG and forging businesses.0 399.5 9128.0 437. 2013 Home Next . forging and boiler. IDPL and power development need significant funding in future As of current portfolio. Further. the general insurance business.000 crore of debt is already drawn. insurance.6 0.7 1778.7 Source: Company & Sharekhan Research Sharekhan 6 September 25. However.7 10522.1 1778.4 173. it needs to infuse debt of around Rs8.investor’s eye stock update NWC trend 60 50 40 30 20 10 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (10) FY13 Loan and advances to subsidiaries Particulars FY12 FY13 Increase (Decrease) YoY -295. JV and others (D+E) Grand total 134.0 4205. being a highly capital intensive business (a long-term concession business).3 127.5 1362.600 crore.7 8334.0 The majority of investments are already done in the ship building. where the management is not likely to enhance any significant investment in the next couple of years. IDPL and the power development business would remain as the major investments for L&T’s parent company going forward.6 6869. Though there is no incremental investment in IDPL during FY2013. The general insurance business is yet to break-even (though the management believes after the merger of Future Generali. Plans equity investor for IDPL and monetise some assets to meet future fund requirements We learned from the management that the company is looking for a long-term equity investor for IDPL. no significant funding to concession projects and to monetise few assets: During FY2013.9 397. Hence.6 4477. the break-even period could be three to four years).6 (D) Total investment in subsidiaries 8687.0 90. the parent company could continue to provide funding for some time.1 46.000 crore in the next three years.2 480.000 crore of equity infusion in the next three years.2 1465. the additional equity investment required would be around Rs4.2 1817.2 9163.6 7.3 818.000 crore of incremental debt as Rs13. the parent company had invested an equity of total Rs1.5 0. turbine and generator (BTG) businesses.0 66.0 0.2 9084. it is one of the major subsidiaries where the parent company has invested and is likely to need a significant funding going forward. Hence.3 4238.0 333.7 35. the equity commitment for IDPL remains at around Rs8.5 1799.1 10221.6 415.5 68.0 2696.1 1438. The power development subsidiaries need an equity investment of around Rs5.0 2696.500 crore out of which Rs2.500 crore.6 325.534 crore in all subsidiaries.0 91. power development business and IDPL would continue to seek equity support from the parent company.000 crore was invested till date. The subsidiary also needs around Rs19.0 Subsidiarieas Associate & JV Other loan & advances Total loan & advances 4500. power development.100 crore out of which the company has already invested around Rs3.3 0.6 1534.7 1886.1 -96.
1 23 14. The management shared that the execution of Hyderabad Metro Project is expected to be commissioned ahead of schedule and they are confident of completing the project well within the budget.9 19 12.6 8.4 52.3 9.030.4 16. Sharekhan 7 September 25.8 10.8 51.6 9. but the company is facing pressure on the margin.6 10.800.0 9.9 3. they indicated their plan to monetise some assets like Dhamra Port (L&T’s 50:50 joint venture with Tata Steel) and Hyderabad Metro Project.8 57.0 9.3 FY2011 43. On the subsidiary side. we have trimmed down our margin estimates and consequently fine-tuned our earnings estimates for FY2014 and FY2015.5 21 11.2 46.2 FY2014E 69.0 11.9 2.8 54.3 15 9.6 5. The company is also working to get clearances on the enhanced capacity.1 17.0 2. Also.4 36.1 50.1 11.663.8 14.5 10.6 2. One-year forward PE band 2000 1800 1600 1400 33x 28x 23x 18x 13x 8x (Rs) 1200 1000 800 600 400 200 0 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 FY2013 60.873.318.6 FY2015E 77.9 19.investor’s eye stock update company.8 3.5 9.9 15 12.220.1 18 14.0 42.3 10.0 2.3 14.4 FY2015E 94.8 18.3 8.9 5.4 56.9 15. they would prefer to hire the same instead of building an asset base for the same.904.0 16 13. Valuations (stand-alone) Particulars Net sales (Rs cr) Growth YoY (%) OPM (%) Adj.010.1 18.5 16.5 17.1 14.2 15.1 25. Hence.7 62.2 13.7 19.5 3. Keeping capex at parent-level low: The management shared that they intend to keep the capex level low in the parent company.5 5.170.3 27.9 -4.4 16.3 2. We believe only the maintenance capex would be incurred and no fresh capacity addition plan would be taken by the parent company. the finance and IT businesses would continue to do well and any development in terms of monetisation of some of its assets would act as a positive trigger.4 22.259.4 2.5 FY2014E 85.711. superior track record and a strong overseas presence.0 FY2012 53.5 17.7 20.404.790.4 FY2012 64.3 12.922.9 12.5 4.7 11 9.089.3 14 10.537. Net profit (Rs cr) Adj EPS (Rs) Growth YoY (%) PER (x) P/B (x) EV/EBIDTA (x) RoCE (%) RoNW (%) Valuations (consolidated) Particulars Net sales (Rs cr) Growth YoY (%) OPM (%) Adj Net profit (Rs cr) EPS (Rs) Growth YoY (%) PER (x) P/B (x) EV/EBIDTA (x) RoCE (%) RoNW (%) FY2011 52.9 3.0 14.3 FY2013 74. Moreover.7 11.0 5.5 3.4 11 13.6 4.5 9.9 17. Even if an additional capacity is required. its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. We retain our positive stance on the stock with a revised price target of Rs1.4 17.8 15.9 19.5 18. 2013 Home Next .2 4.752.8 4.4 2. View and valuation L&T is better placed than its peers to weather the economic slowdown due to its wide range of businesses.313.498.0 14.9 12.3 1.1 Though the order inflows are on track to sustain a decent growth in the revenues. the company is planning to sale its stake in Dhamra Port.0 17.1 7.1 Sharekhan Limited.752.6 11.170.
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