13-Jun-2021

LARSEN & TOUBRO LIMITED

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L&TDHD
is one of Asia's largest vertically integrated Engineering & Construction (E&C) conglomerates, with a strong market position
across segments such as infrastructure, power, hydrocarbons, heavy engineering, defense engineering, electrical and automation,
information technology, technology services, metallurgical & material handling, and machinery & industrial products.

L&T addresses critical needs in key sectors - Hydrocarbon, Infrastructure, Power, Process Industries and Defence - for customers in
over 30 countries around the world. The company’s manufacturing presence extends across eight countries in addition to India. L&T
is engaged in core, high impact sectors of the economy and the integrated capabilities span the entire spectrum of ‘design to deliver’.

With eight decades of a strong, customer focused approach and a continuous quest for world-class quality, the company have an
unmatched expertise across Technology, Engineering, Construction, Infrastructure Projects and Manufacturing, and maintain a
leadership in all the major lines of business.

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. The company generated
63% of revenues from domestic and remaining 37% from other countries in FY21.

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DHD SEGMENT WISE ORDER BOOK (FY21) SEGMENT WISE REVENUE MIX (FY21)
1% 4%
2% 4%
4%
2% 2%
3%

14%
13%

45%

75%
31%

Infrastructure Hydrocarbon Power Infrastructure Services Hydrocarbon

Defence Engineering Heavy engineering Power
Defence Engineering Heavy Engineering Others Others

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L&T’s Business Structure
DHD

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L&T’s Business Model
DHD EPC: Focuses on core competencies of conceptualizing,
executing and commissioning large, complex
infrastructure projects in the areas of Roads and Bridges,
Power Transmission & Distribution, etc.

Manufacturing: Mainly concentrated around defence

and shipbuilding, heavy custom-built equipment catering
to process industries, etc.

Services: Services businesses cater to sectors of

Information Technology (through LTI and Mindtree),
Technology Services (through LTTS), Smart World &
Communication, Real Estate and Financial Services
(through LTFHL).

Development: Undertook development projects such as

the Hyderabad Metro, road operations and tolling
(through IDPL), Nabha Power and Uttaranchal Hydel
Power, among others.

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 GROWTH
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DHD SALES GROWTH

The net sales in FY21 de-grew by 6.5% YoY to
₹1,35,979 cr led by 10.7% de-growth in the ex-
services business as the execution was impacted in
H1 FY21. The services business reported a modest
growth of 4.1% primarily aided by the IT & Mindtree
business segment. However, the financial services
and developmental projects segment remain
impacted during year.
The consolidated order book was higher by 8% YoY at
₹3,27,354 cr while the order inflows de-grew by 6%
YoY at ₹1,75,497 cr on account of Covid disrupted
business environment.
In Q4 FY21, the revenue grew by 8.7% YoY to
₹48,088 cr led by improvement in the economic
activities prior to the onset of the current Covid
second wave.

5 Year CAGR: 5.9%

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DHD EBITDA GROWTH

The EBITDA also de-grew by 4.3% YoY to ₹23,315 cr
as both the ex-services and services segment EBITDA
de-grew by 8% & 4.8% respectively during the year.
The services segment EBITDA was impacted mainly
due to the financial services and the development
projects businesses.
In Q4 FY21, the EBITDA grew by 16.3% YoY to ₹8,205
cr aided due to job mix and better site productivity in
majority of the business segments.

5 Year CAGR: 8.6%

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DHD PAT GROWTH

The PAT in FY21 dipped by 54% YoY to ₹4,669 cr due
to an exceptional charge of ₹3,732 cr which was due
to a) impairment of funded exposure in the heavy
forgings facility joint venture worth ₹1,075.30 cr and
b) impairment of assets in the power development
business worth ₹2,657 cr.
However, taking into account the share of profits
from the discontinued operations (electrical &
automation business) worth ₹8,237.9 cr the
consolidated net profit was higher by 21.3% YoY to
₹11,583 cr.
In Q4 FY21, the PAT grew by 11.5% YoY to ₹3,661 cr.

5 Year CAGR: -3.4%

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 GROWTH EDGE METER: 4
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 PROFITABILITY
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DHD EBITDA MARGIN

The EBITDA margin of the company has been in the
range of ~16% - 18% over the past several years. In
FY21, the EBITDA margin improved to ~19.7% largely
due to the margin expansion in a majority of the ex-
services business segment during Q4 FY21, lower
manufacturing, construction and operating (MCO)
costs and higher other income.

The margin in Q4 FY21 was aided primarily on

account of mix of jobs and execution efficiencies.
Hence, the EBITDA margin in Q4 FY21 was
substantially higher at ~17.1% (v/s 15.9% in Q4
FY20).

The management has guided that it would continue

to focus on maintaining the margin in the 8%-12%
band on a standalone basis.

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DHD PAT MARGIN

In FY21, the PAT margin stood at ~3.43% mainly
impacted due to exceptional impairment charge,
however, removing the one time impairment
charges, the adjusted PAT margins stood at ~6.05%.

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DHD ROCE
Over the past 4 years, the ROCE has improved from
11.19% in FY16 to 13% in FY20, which was led by an
improvement in the overall EBIT. In FY21, the ROCE
has broadly remained at similar levels.

L&T has been working on bringing an overall cost and

operational efficiencies for achieving profitable
growth. The key endeavor is to lower costs as well
put greater emphasis on contract and project
management.

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DHD ROE
Alike the ROCE, the ROE has also improved since the
past 5 years from 12.78% in FY15 to 16.86% in FY20.
This has been aided due to higher growth in the net
profits of the company during the period. In FY21,
the ROE also stood at similar levels.

Better profitability over the years was led by the

company’s focus on cost effective operations,
scrutinizing the orders whether they meet the
minimum margin threshold, leveraging technology
for productivity gains, higher other income led by
better treasury gains and lower effective tax rate
during the period.

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 PROFITABILITY EDGE METER: 3
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 EFFICIENCY
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DHD CASH FLOWS

In FY21, the CFO stood at ~₹22,844 cr aided by
working capital flows.

Under investing activity, the company invested

~₹1,808 cr for capex activities and ₹16,842 cr for
purchase of financial investments. Hence, cash
outflows from investing activities stood at ~₹5,429 cr.

Under financing activity, the cash outflows stood at

~₹15,274 cr as the company was able to repay a
major part of the borrowings.

L&T has a cash and bank balance of ~₹16,200 cr

which it plans to give back to the shareholders via
buybacks, subject to SEBI approvals. It also plans to
run down the borrowings of Hyderabad metro from
the cash buffer.

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 EFFICIENCY
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WORKING
DHD CAPITAL CYCLE
L&T has had healthy working capital days over the
years on account of lower receivable days and high
payable days.

Initiatives such as putting emphasis on speedy

customer collections, accelerating invoicing of work
completed and reducing inventory levels has
primarily helped to improve the working capital cycle
days.

The working capital cycle for the period of 9M FY21

had been very robust due to steady customer
collections. During the period, the entire operations
were funded from customer collections and no cash
reserves were used.

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DHD FREE CASH FLOW

Free cash flow has been mostly negative barring in
FY17 & FY20 mainly due to higher capex outflows.
Being a capital intensive business, the company
witnesses huge sums of capital outflows which are
needed for upgradation, acquisition and expansion.

The capex-to-revenue has come down to 1.3% in

FY21 from 11% in FY12 which has majorly helped to
reduce the negative FCF of the company. In FY21, the
FCF per share is higher, as L&T had cut down the
capex spends due to the uncertain economic
situation.

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 EFFICIENCY
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ASSET
DHD TURNOVER RATIO
Over the years, the company has had a stable asset
turnover ratio at ~0.50x. However, in FY21 it saw a
marginal decline due to the impact of revenue de-
growth during the year.

Wide diversified business portfolio, strategic

execution policies, large clientele and consistent
inflow of orders has helped the company maintain a
stable sales growth rate.

This along with optimal capital expansion programs

has led to the company meeting a stable asset
turnover ratio over the years.

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 EFFICIENCY EDGE METER: 4
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 SOLVENCY
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DHD DEBT TO EQUITY

L&T has a fairly stable debt to equity ratio over the
years on a standalone basis. In FY21, the debt to
equity stood lower at 0.39x on a standalone basis.
The company paid a substantial amount of the debt
driven by a) completion of the sale of the
engineering & automation (E&A) business and b)
improved working capital cycle.

On a consolidated basis, the debt to equity ratio

stood at ~1.75x in FY21. However, this includes the
amount for the financial services business (L&T
Finance Holdings) in which the company holds
63.62% stake. Hence, given the nature of the
business the debt equity levels are still at
comfortable levels.

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INTEREST
DHD COVERAGE RATIO
The interest coverage ratio has been fairly
comfortable as of FY20. As the debt levels were
maintained at a certain level hence the interest
burden was also very stable over the years. However,
in the past 3 years, there has been a substantial
increase in the interest payment obligations from
₹1,525 cr in FY17 to ₹2,420 cr in FY21. This was
mostly attributable to higher interest cost in L&T
Hyderabad metro rail’s higher level of borrowings in
the infrastructure business and an increase in the
LIBOR rates (in 2017-18).

On a standalone basis, the EBIT has been fairly stable

along with steady cash flows over the years.

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DHD CURRENT RATIO

The current ratio of L&T has been more or less stable
and healthy over the years at around 1.30x. The
company has maintained an optimum mix of the
current assets and the current liabilities.

Most of the current assets (~42%) form part of

financial assets as the company invests any excess
cash into various mutual fund investments and other
deposits. On the other hand, most of the current
liabilities (~70%) form a part of financial liabilities
which includes trade payables and short term
borrowings.

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 SOLVENCY EDGE METER: 4
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 VALUATION
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DHD PE RATIO
L&T is currently trading at TTM multiple of 18.22x.

The company has seen a 6% YoY decline in the order

inflow in FY21. The current order book still stands
strong, providing earnings visibility for few years.

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DHD DIVIDEND YIELD

For the year FY21, L&T has declared an equity
dividend of 1800% amounting to ₹36 per share. The
dividend payout stood at 44% during the year.

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DHDTECHNICAL ANALYSIS
L&T had been consolidating between ₹1100 and
₹1600 from the middle of the year 2017. The stock
collapsed in March 2020 during the Covid and
lockdown panic and made a low of ₹660. It however
quickly recovered upto ₹1000 and finally saw
renewed momentum since November 2020, taking
the stock upto ~₹1600 in February 2021.

In line with our expectations, the stock found

support near ₹1300 in April 2021 and has remained
strong since then. A move above ₹1600 is likely to
pave way for ₹1900 while on the downside ₹1450 is
the immediate support.

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 VALUATION EDGE METER: 3
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 QUALITY
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DHD MANAGEMENT
The management’s focus remains on ensuring
efficient conversion of the order book into healthy
margins through execution, operational excellence
and digitalization initiatives and driving the growth of
the services businesses having a high ROE profile.

The management has been proactive in managing

the workforce during the pandemic and slowed
down execution from the month of February 2020
itself. Though it led to lower execution of the
projects, but in the latter half, the company has been
able to bring up the work force efficiently.

The management has been working on divesting the

non-core assets to improve the capital efficiency and
also invest and improve the core businesses which
would generate stakeholder returns in the long term.

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SHAREHOLDING
DHD PATTERN
The company has no promoter shareholding and is
fully managed by a professional team.

FII shareholding increased to 22.02%, while the DII

shareholding decreased to 33.69% in March 2021.
Non Institutional holdings has also decreased to
44.29% during the quarter.

Top public shareholding:-

L&T employee trust 13.91%

LIC 13.90%
Qualified institutional buyer 4.56%
SBI Long term advantage fund 3.32%
HDFC trustee company 3.07%

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DHD SECTOR POTENTIAL

Infrastructure Sector:
• Robust demand: As per various industry reports, India is expected to be the third largest construction market globally by 2022.
India has a huge requirement of ~₹100 trn (~US$1,400 bn) towards development of infrastructure by 2024. Infrastructure sector
witnessed healthy attraction in order inflows with roads, railways, irrigation, power transmission and energy driving the
investments.
• Government policies: Government has been working on reducing the bottleneck and stimulate the growth to kick start spending
on various initiatives such as ‘Housing for All’ and ‘Smart Cities Mission’. The government plans to invest ₹2.05 trn (US$31.8bn) in
the smart cities mission. 100% FDI is permitted under the automatic route across various infrastructure sectors.
• Attractive opportunity for the sector: In our view, healthy fundamentals, attractive valuations along with strong earnings growth
makes this sector an attractive investment opportunity. Opportunity in roads continues to remain huge. Bharatmala itself is a ~₹6.3
trn plus opportunity in the road sector. Various other schemes such as the Regional Connectivity Scheme (RCS) and coastal
shipping give opportunity for development of airports and ports.
• Increasing foreign investments: Over the last few years, India witnessed a substantial rise in foreign investment. The major players
being China Harbour Engineering, DBS, Mizuho Financial Group, Cube highways, Canadian pension funds, etc. FDI inflow in India
stood healthy at US$7.3bn for the period July-Sep’19. The sector has being a prime focus in getting FDI inflows with deals such as
GIC investment in IRB’s BOT assets, CPPS investment in SIPL, Cube highways buying assets of Infra companies, etc.

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COMPETITIVE
DHD LANDSCAPE
Larsen & Toubro is the largest company in the
infrastructure sector in India with a presence in
almost every sub-sectors. The company has been
witnessing one of the highest quarterly order inflows
in the history of the company.

Over the years, the company has also gained market

share and consolidated its leadership in various
segments. The odds of L&T further consolidating its
market share is high as the company is better placed
to deal with the fallout of the competition.

Unlike other infrastructure companies, L&T has a fair

degree of flexibility to move across segments due to
its various capabilities.

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DHD FUTURE OUTLOOK

• Healthy order book to drive the revenues – The company had a healthy order book of ₹3,27,354 cr. Although the execution was
impacted in the infra segment due to lack of man power availability and supply side issues, but over the last few quarters, L&T has
accumulated strong orderbook in Infrastructure space. The management expects a low mid-teens growth in the order inflows and
revenue for FY22.
• Exit from non-core businesses to drive capital efficiency – L&T has exited from multiple capital inefficient assets and non-core
businesses over the last few years. The company recently completed the largest non-core asset divesture by selling its Electrical
and Automation business to Schneider Electric at a post-tax consideration of ₹11,000 cr. The proceeds have been used to reduce
debt and invest into other core assets. By this way, the company has been working on improving the capital efficiency and has been
able to manage the debt levels as well.
• A well diversified business - L&T has been able to diversify its business into various other sectors such as IT and financial services.
This has helped the company tide through economic downcycles when the core infrastructure business would be low. The
company has a target to bring up the contribution of the services business to 40% of the consolidated revenues (currently at
~35%). These measures are expected to bode well for the company in stabilizing it’s earnings over the long term.
• Near term outlook - In the near term, the management aims to grow its revenue and order inflows. Hence, sees low mid teen
growth ahead. In the past 1 year, the management prioritized on improving the balance sheet strength over growth. However,
currently, it expects improvement in the private sector capex which would aid the engineering & construction (E&C) business. This
would bring the share of private sector to the total order book to 25%-30% from 18% at present.

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 QUALITY EDGE METER: 4
An Edge Meter is a graded measurement of certain aspects of a company on a scale of 1 to 5, 5 denoting the highest rating. Since
judgement on equity is subjective because different people will have different expectation from their investments, it is better to study
each aspect and give an individual grading to arrive at the final evaluation of a stock.
 FINAL
ABOUTEDGE
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DHD
Edge Meter Aspects Grade
Growth 4
Profitability 3
Efficiency 4
Solvency 4
Valuation 3
Quality 4
TOTAL 22

The maximum grade for a company could be 30. Any company above grade 20
is worth considering. A grade below 15 is considered to be poor.
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DHD

THANK YOU
This document and the process of identifying the potential of a company has been produced only for learning purposes. Since
equity involves individual judgements, this analysis should be used for only learning enhancements and cannot be considered to
be a recommendation on any stock or sector. Our knowledge team has limited understanding and we all are learning the art and
science behind this.

www.stockedge.com

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DISCLOSURES
DHD
Neither Kredent Infoedge P Ltd. nor any of its associates have any financial interest in the subject company.
Neither Kredent Infoedge P Ltd. nor any of its associates have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of
the month immediately preceding the date of publication of the research report or date of the public appearance.
Neither Kredent Infoedge P Ltd. nor any of its associates has, any other material conflict of interest at the time of publication of the research report or at the time
of public appearance.
Neither Kredent Infoedge P Ltd. nor any of its associates have received any compensation from the subject company in the past twelve months.
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months.
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the subject company in the past twelve months.
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banking or brokerage services from the subject company in the past twelve months.
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