Initiating Coverage June 15, 2020

RETAIL RESEARCH
Larsen & Toubro Ltd

Industry LTP Base case Fair Value Bull Case Fair Value Buy Range Time Horizon
Construction & Engineering Rs.925.9 Rs. 1045 Rs. 1136 Rs. 820-845 2 quarters

HDFC Scrip Code LARTOUEQNR Our Take:

BSE Code 500510 Larsen & Toubro is the foremost player in Infrastructure and Engineering space in India and company has footprints in technology
and financial services as well. The company addresses critical needs in key sectors such as Hydrocarbon, Infrastructure, Power,
NSE Code LT Process Industries and Defence. The company has a robust order book of Rs 3,03,900 crore out of which Rs 2,28,900 crore is from
Bloomberg LT IN domestic segment while international orders are of Rs 75,000 crore. The company would be beneficiary of Government’s thrust on
infrastructure development and the unveiling of National Infrastructure Pipeline (NIP) augurs well for the company. L&T remains the
CMP June 12 2020 925.9 best proxy of the Indian capex/Infra story. It could further consolidate its market share in the post-COVID-19 times. In a tough macro
Equity Capital (Rscr) 280.72 environment for the construction industry and likely survival challenges for debt-ridden companies. L&T could emerge stronger after
this painful period comes to an end. In the meanwhile the IT subsidiaries could provide some comfort/support. To ensure adequate
Face Value (Rs) 2
margin of safety in these uncertain times, we think investors could buy the stock on dips to Rs.820-845.
Equity Share O/S (cr) 140.3
Valuations &Recommendation:
Market Cap (Rscrs) 129996
L&T reported its Q4FY20 numbers largely in line with expectations with no guidance for FY21 (on expected lines). Amidst the
Book Value (Rs) 451 lockdown, company has won a flurry of orders which will give cushion in turbulent times. The company has a robust order book of Rs
Avg. 52 Wk Volumes 4022844 3,03,900 crore with 25% share of International orders and from remaining 75% of domestic orders. 80% of orders are immune from
any execution risk. Schneider deal is on track and is likely to close by early Q2FY21, deal proceeds may partly get utilized towards
52 Week High 1606.7
rightsizing L&T Hyderabad Metro’s capital structure. We believe L&T is perfectly poised for a cyclical recovery and would also be
52 Week Low 661.05 beneficial of various Government initiatives. We also like management’s conservative business approach with growing focus on
being asset-light/returns-generation. L&T has outperformed benchmark indices in each recovery cycle. We have estimated modest
~3% CAGR in Revenues/EBITDA/PAT over the two years FY20-22E. We have arrived at a base case fair value of Rs.1045 for the next
Share holding Pattern % (Mar 31, 20) two quarters. Post the sharp correction in its stock price these headwinds are priced in to some extent. Its strong Balance Sheet
Institutions 56.48 augurs well from liquidity perspective.

Non Institutions 43.52 Valuation Summary

Business Valuation Methodology Rs (Cr.) Rs/share
Total 100.0 L&T E&C business 16.5x Mar-21 E&C Earnings 98,450 701
L&T Infotech HDFC sec Target Valuation with 25% holdco discount 17,500 125
Fundamental Research Analyst L&T Tech Services HDFC sec Target Valuation with 25% holdco discount 6,600 47
Manthan Jhaveri Mindtree HDFC sec Target Valuation with 25% holdco discount 7,600 54
Manthan.jhaveri@hdfcsec.com L&T Finance Mcap with 25% holdco disc 6,000 43
Other Subs., Associates and Development Portfolio 0.7x P/BV of Invested Equity 10,500 75
Target Price 146650 1045
(Source: HDFC sec Research)

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Multiples Summary Table

Scenario Price (Rs.) Target Multiple (x)
CMP 926 13
Buy range 833 (820-845) 11.5
Base Case Fair price 1045 16.5
Bull Case Fair price 1136 18.5

Financial Summary
Particulars (Rs cr) Q4FY20 Q4FY19 YoY-% Q3FY20 QoQ-% FY19 FY20 FY21E FY22E
Net Revenues 44245 43303 2 36243 22 135220 145452 139213 153578
EBITDA 5121 5279 -3 4118 24 15330 16329 13228 17668
Depreciation 711 435 63 660 8 1923 2462 2410 2497
Other Income 661 611 8 475 39 1837 2361 2484 2884
Interest Cost 821 507 62 709 16 1803 2797 2687 2841
Tax 966 1234 -22 711 36 4067 3263 2671 3829
APAT 3197 3418 -6 2352 36 8906 9550 6912 10198
Diluted EPS (Rs) 22.8 24.4 16.8 63.5 68.1 49.3 72.7
(Source: Company, HDFC sec Research)

Recent Developments
 In Q4FY20, consolidated revenues increased marginally by 2% YoY at Rs 44,245 crore while EBITDA fell by 3% to Rs 5120
crore. EBIDTA margins narrowed by 60 basis points to 11.6%. Net profit (including discontinued operations) fell by 6.5%
YoY to Rs 3200 crore. Larsen missed booking Rs 1750/400 crore Revenue/PAT due to COVID-19 disruption.

 Higher Other Income, lower tax and higher share in JVs/Associates helped L&T in Q4FY20.

 The order inflow for the quarter stood at Rs 57,785 crore, registering a 5% YoY growth with significant orders received in
Infrastructure segment. Total order inflows for FY20 stood at Rs 186,356 crore registering a 9% YoY growth, marginally
missing guidance of 10-12%. The consolidated order book as on March 2020 stood at Rs 303,857 crore. International
orders constitute 25% of the total order book.

 The company expects that the initial quarters of FY21 are expected to be adversely affected by the current upheaval, and
expects growth revival in the later part of the financial year assuming things get better from here. Amidst the lockdown
company has won a flurry of orders which will give cushion in turbulent times.

 The company has removed Rs 29000 crore of order from order book in FY20, not specifically because of COVID-19. All
orders in Andhra Pradesh which has been stayed by green tribunal have been removed. The current order book is net of
slow moving orders.

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 The working capital as a portion of sales has risen due to payments to vendors. In FY20, working capital was 23% of sales
compared with 18% in the previous fiscal.

Long term Triggers

 L&T operates in various segments including Infrastructure, Power, Heavy Engineering, Defence Engineering, Electrical &
Automation (shown as discontinued operations), Hydrocarbon, Shipbuilding, Material Handling, Mining Equipment, IT and
Financial Services. L&T has a dominant position in most operating verticals, be it oil & gas, factories & building, process
projects, roads, bridges and industrial structures. This gives flexibility to pick projects, which helps optimise overall
business growth. Deep understanding of market dynamics, resources, operational expertise and integration capabilities
enables the Company to compete effectively across these sectors. The cumulative order inflows for FY20 were at Rs
1,86,400 crore. The company has a robust order book of Rs 3,03,900 crore out of which Rs 2,28,900 crore is from
domestic segment while international orders are of Rs 75,000 crore.

 Infrastructure is the key driver for the Indian economy and enjoys intense focus of the government for initiating policies
to create world-class infrastructure. The infrastructure segment – especially the EPC sector has witnessed strong order
inflow in recent times. The infrastructure segment make up 55% of the FY20 order inflow composition and about 74% of
FY20 order book. The capex in the economy continues to be driven by public sector mainly in the areas like Power
(Renewables and T&D), Transportation (Roads, Railways and Metro projects) and Defence. With India expected to invest
significantly in infrastructure creation over the next few years with thrust on domestic manufacturing through its ‘Make
in India’ project, the companies with focus on domestic market are in a sweet spot. However, due to COVID-19 outbreak,
we expect delay in Government spending.

 The order book of the company is well protected as 80% of domestic order book is from Central/State/PSU clients and of
that 35% is funded by multilateral agencies and 50% is funded by state/central. Hence we don’t expect any significant risk
in execution. The work in Maharashtra has not experienced any hiccups barring 2 projects - metro and coastal road -
because of PIL against these projects but that has been resolved and work has started.

 The sale of E&A business (shown as discontinued operations) to Schneider was supposed to be completed by 31st March
2020. But due to COVID-19 crisis, the deal is not yet completed. However, deal is at fairly high point of closing. As
international travels resumes, deal should be completed in next 2-3 months time. There is little risk of deal getting
revalued or cancelled. Inflow from the deal of ~Rs 14000 crore will be partly utilized toward right sizing L&T Hyderabad
Metro’s capital to achieve sustainable debt levels in the project. This will however upset expectations of a buyback or
special dividend out of these sale proceeds and delay the efficient capital allocation process.

 L&T has plans to monetize Hyderabad Metro, probably through InvIT structure. It will wait for trains to resume but at the
moment ridership is zero. Going forward, ridership of the metro would be impacted due to WFH policy. L&T will have a

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check on the progress of the situation and as of now InvIT plans have been delayed. Currently, focus is on rightsizing
capital structure of L&T Hyderabad Metro by cutting debt and making it sustainable.

 The Government’s humongous Rs 111 lakh crore National Infrastructure Pipeline (NIP) initiative, in accordance with the
Government’s vision to make India a US$5 trillion economy by 2024-25 provides a tremendous opportunity for the
company in coming years.

What could go wrong? -

 The unprecedented event of COVID-19 has halted activities across the nation and infrastructure spending might take a
hit. Even in Govt. backed projects we may witness some execution delay due to lack of materials, men or funds.

 Deep global recession and slower than expected recovery.

 Higher than expected losses from the Hyderabad Metro.

 Stressed payment cycles for government projects.

 L&T may choose working capital management above revenue growth for some time.

 Return ratios (esp. RoCE) of L&T may remain low for some more time even as it grapples with rising working capital
requirements and low OPM in its core E&C business.

 Funds requirement from its Real estate/ Housing/LAP business may keep growing till the sector bottoms out.

Company Profile:
Larsen & Toubro (L&T) is the foremost player in Infrastructure and Engineering space in India and company has interests in
technology and financial services as well. L&T has presence globally in over 30 countries around the world. Larsen addresses
critical needs in key sectors such as Hydrocarbon, Infrastructure, Power, Process Industries and Defence.

The Company serves the Government and large corporate customers across multiple sectors, both in India as well as globally.
The Realty and Financial Services businesses provide B2C offerings as well in addition to B2B products/services.

L&T is engaged in core, high impact sectors of the economy and possesses integrated capabilities spanning the entire
spectrum of ‘design to deliver’, with 8 decades of strong, customer focused approach and continuous quest for world-class
quality.

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FY20 Order Inflow Composition FY20 Order Inflow Composition (Region Wise)

(Source: Company, HDFC sec Research)

FY20 Order Book Composition FY20 Order Book Composition (Region Wise)

(Source: Company, HDFC sec Research)

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Financials
Income Statement (Consolidated): Balance Sheet (Consolidated):
(Rs Cr) FY18 FY19 FY20 FY21E FY22E As at March FY18 FY19 FY20 FY21E FY22E
Net Revenue 119683 135220 145452 139213 153578 SOURCE OF FUNDS
Other Income 1535 1837 2361 2484 2884 Share Capital 280.3 280.6 280.6 280.6 280.6
Total Income 121218 137057 147813 141697 156462 Reserves 55377 62094 66441 73576 80182
Growth (%) 9.5 13 7.6 -4.3 10.3 Shareholders' Funds 55657 62375 66723 73858 80464
Operating Expenses 106112 119890 129123 125985 135910 Minority Interest 5625 6826 9520 9228 10423
EBITDA 13571 15330 16329 13228 17668 Long Term Debt 88192 96331 107728 106331 105331
Growth (%) 22.5 13 6.5 -19 33.6 Short Term Debt 19332 29224 35446 36724 35724
EBITDA Margin (%) 11.3 11.3 11.2 9.5 11.5 Net Deferred Taxes 638 311 1453 311 311
Depreciation 1929 1923 2462 2410 2497 Long Term Provisions & Others 946 912 1641 912 912
EBIT 11642 13407 13867 10818 15171 Total Source of Funds 170390 195979 222510 227363 233164
Interest 1539 1803 2797 2687 2841 APPLICATION OF FUNDS
PBT 11638 13441 13431 10615 15214 Net Block 12673 15113 12330 14481 14333
Tax 3199 4067 3263 2671 3829 CWIP 13443 13920 3311 5895 5994
Minority Interest 635 1311 1345 1072 1195 Goodwill 1562 1827 8011 8011 8011
Share of Associate Profits -436 -21 72 40 8 Investments 10193 11215 11062 11658 11775
RPAT 7368 8042 8895 6912 10198 Other Non-Current Assets 90447 102945 125799 125130 127564
EO Items (net of tax) -123 864 655 0 0 Total Non Current Assets 128318 145020 160513 165175 167677
APAT 7245 8906 9550 6912 10198 Inventories 4848 6414 5747 5857 6007
APAT Growth (%) 22.4 22.9 7.2 -27.6 47.5 Trade Receivables 34654 36845 40731 39585 41628
EPS 51.6 63.5 68.1 49.3 72.7 Short term Loans & Advances 2354 3177 3644 3262 3914
Cash & Equivalents 17497 25672 27817 28572 29805
Other Current Assets 55922 61218 69686 66203 66865
Total Current Assets 115275 133326 147625 143479 148219
Trade Payables 31571 42994 43644 42020 43692
Other Current Liab & Provisions 41631 39373 41984 40246 40015
Total Current Liabilities 73202 82367 85628 82266 83707
Net Current Assets 42073 50959 61997 61213 64512
Misc Expenses & Others 975 975
Total Application of Funds 170390 195979 222510 227363 233164
(Source: Company, HDFC sec Research)

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Cash Flow Statement (Consolidated): Key Ratios (Consolidated):

(Rs Cr) FY18 FY19 FY20 FY21E FY22E FY18 FY19 FY20 FY21E FY22E
Reported PBT 11,516 14,286 14,314 10,655 15,222 Profitability (%)
Non-operating & EO items -1,070 -1,938 -1,041 -2,484 -2,884 EBITDA Margin 11.3 11.3 11.2 9.5 11.5
Interest Expenses 873 1,802 2,796 2,687 2,841 EBIT Margin 9.7 9.9 9.5 7.8 9.9
Depreciation 1,929 1,923 2,462 2,409 2,497 APAT Margin 6.1 6.6 6.6 5 6.6
Working Capital Change -19,876 -15,946 -7,791 -15,066 -4,499 RoE 13.7 15.1 14.8 9.8 13.2
Tax Paid -3,403 -4,882 -4,046 -2,672 -3,829 RoCE 5.3 5.6 5.6 4 5.4
OPERATING CASH FLOW ( a ) -10,031 -4,755 6,694 -4,471 9,348 Solvency Ratio
Capex -2,015 -3,499 -3,299 -2,150 -2,450 Debt/EBITDA (x) 7.9 8.2 8.8 10.8 8
Free Cash Flow -12,046 -8,254 3,395 -6,621 6,898 Net D/E 1.6 1.6 1.7 1.6 1.4
Investments 1,903 -8,606 -6,148 -115 -117 Interest Coverage 7.6 7.4 5 4 5.3
Non-operating income 4,027 1,083 1,191 2,484 2,884 PER SHARE DATA
INVESTING CASH FLOW ( b ) 3,915 -11,022 -8,256 219 317 EPS 51.6 63.5 68.1 49.3 72.7
Debt Issuance / (Repaid) 12,619 18,174 14,126 10,500 -2,000 CEPS 65.4 77.2 85.6 66.4 90.5
Interest Expenses -2,470 -2,983 -2,739 -2,687 -2,841 BV 397 445 476 527 574
Share Capital Issuance 50 11 18 0 0 Dividend 17 19 32 20 26
Dividend -2,389 -2,647 -4,551 -2,805 -3,591 Turnover Ratios (days)
Others 1,562 2,885 -481 Debtor days 106 99 102 104 99
FINANCING CASH FLOW ( c ) 9,372 15,440 6,373 5,008 -8,432 Inventory days 15 17 14 15 14
NET CASH FLOW (a+b+c) 3,256 -337 4,811 756 1,233 Creditors days 96 116 110 110 104
Other Current Asstets days 178 174 184 182 168
Other Current Liabilities days 127 106 105 106 95
Working Capital Days 75 68 85 85 82
VALUATION
P/E 18 14.7 13.7 18.9 12.8
P/BV 2.3 2.1 2 1.8 1.6
EV/EBITDA 16.5 15.3 15.3 18.8 13.9
Dividend Yield (%) 1.8 2 3.4 2.1 2.7
Price Chart (Source: Company, HDFC sec Research)

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