Initiating Coverage Larsen Toubro Ltd. - The Smart...

Larsen & Toubro (L&T), a USD 11.7 bn company, is the India’s largest Engineering & Construction (E&C) Company with diversified business portfolio in power, infrastructure, hydrocarbon, manufacturing of industrial products etc. L&T also offers IT services, financial services including infrastructure financing through its different subsidiaries. Increased Outlay for Core Sectors in 12th Plan ‐ A Big Opportunity for L&T India has been able to grow at healthy rate in recent past, and to sustain this growth momentum further, we need adequate investments in Infrastructure, Power, and Petrochemical sectors as these sectors play a major role in economic growth. Government of India is focused on building infrastructure such as roads, bridges, airports, railways, ports etc. along with scaling up power generation capacity to reduce power deficit and increase domestic oil & gas production in order to reduce the high dependence on imports. For first 3 years of 11th Plan, share of infrastructure investments increased to 7.1% of GDP, while the Government is expected to increase it to USD 1,000 bn for the 12th Plan period (2012‐17) or about 10% of GDP (about 2.0x allocation for the 11th Plan). A tentative power capacity addition of approx. 100,000 MW has been envisaged for the 12th Plan with expected investment of Rs. 11,000 bn. To boost oil & gas E&P activity the government is aggressively allotting blocks through NELP. L&T, being the India’s largest E&C player with presence across sectors, strong execution capabilities, superior technology and long track record & experience, is expected to capitalize the most from these imminent opportunities. Strong Order‐Book & Fast Execution of Infra/Power Projects Provide Growth Visibility L&T’s order book position stood at Rs. 1,302.2 bn (3x its TTM Rev) at the end of FY11. L&T expects 15‐20% growth in its order inflows during FY12 with major orders expected in Road, Airport, Railways, Hydrocarbon, Power and steel segments. While order inflows during FY11 grew at a relatively slower pace of 15% to Rs. 797.7 bn mainly due to delay in decision making & project clearance across all the core sectors given the land acquisition issues, environmental clearance issues and other political issues during the last 6 months, however, L&T witnessed a decent improvement in pace of award decisions in infrastructure sector during Q4FY11. Infrastructure & power sectors form 68% of its order book and L&T has witnessed pickup in execution of projects under these segments and expects significant contribution in Revenues in FY12 from these projects. Its long gestation BTG orders have also started to contribute to its revenues. Hence, with increased execution from infrastructure & power sectors, and strong order book, we expect L&T to deliver robust Revenue growth in ensuing period. Business Restructuring Plan for Value Unlocking & Higher Growth To unlock value of its different businesses & drive its future growth, L&T intends to restructure its business under nine empowered business entities, which include the Building & Factories, Infrastructure, Heavy Engineering & Systems, Industrial Projects & Water, Electrical Construction, Hydrocarbons, Electrical & Automation, Mechanical & Industrial Products, and Power Equipment with separate boards for each entity comprising of experts from related industries. L&T also plans to list these entities in the future, once they gain critical mass and required maturity. In line with its restructuring plan, Board of Directors of L&T recently has approved, seeking of shareholders approval for transfer of the electrical & automation (E&A) business to a subsidiary and/or associate company or to any other entity. Its subsidiary L&T Finance Holdings Ltd has also file prospectus with SEBI for public issue of Rs. 17.5 bn. With these actions, L&T aims for an ambitious target to grow its business four times in the next ten year. These steps, in our opinion, will not only lead to a stronger balance sheet and accelerated business growth and but will also lead to value unlocking & high shareholders wealth creation. Attractive Valuation with Robust Growth Outlook Considering its strong order book and decent growth expected in order inflows during FY12 along with execution pick up in core sector’s projects, we expect its Standalone Revenues to grow by 24% & 18% in FY12E & FY13E, respectively, while its EBITDA margins to decline by 40 bps & 10 bps to 12.4% & 12.3 % in FY12E & FY13E, respectively. The CMP of Rs.1631 discounts its FY12E & FY13E consolidated EPS of Rs.85.1 & Rs.98.6 by 19.2x & 16.5x, respectively. We have valued L&T based on SOTP & initiate coverage with Buy rating & target price of Rs.1960.

KEY FINANCIALS (Standalone)

Y/E Mar. Revenue(Rs mn)

APAT(Rs mn)

AEPS(Rs)

AEPS (% Ch.)

P/E (x)

ROCE (%)

ROE (%)

P/BV(x)

FY10 370,348 31,650 52.6 13.6 31.0 19.9 20.6 5.4FY11E 439,049 36,250 59.5 13.3 27.4 18.8 18.3 4.7FY12E 544,371 44,438 72.2 21.3 22.6 19.8 19.4 4.1FY13E 642,358 51,550 83.1 15.1 19.6 20.1 19.4 3.5

ENGINEERING

SHARE HOLDING (%) Promoters 0.0 FII 15.2 FI/MF 37.5 Body Corporate 6.8 Public & Others 40.5

STOCK DATA

Reuters Code Bloomberg Code

LART.BO LT IN

BSE Code NSE Symbol

500510 LT

Market Capitalization*

Rs. 994.9 bn US$ 22 bn

Shares Outstanding* 610 mn

52 Weeks (H/L) Rs.2212 / 1463

Avg. Daily Volume (6m) 304401 Shares

Price Performance (%)

1M 3M 6M

2 1 (17)

200 Days EMA: Rs. 1707

*On fully diluted equity shares

Part of Classic

ANALYST

Dhananjay Mishra | +91 22 4093 5084 [email protected]

SALES: Devang Shah | +91 22 4093 6060/61 [email protected]

Nishit Shah | +91 22 4093 6074 [email protected]

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member: BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

Larsen & Toubro Ltd. MAY 31, 2011 BUY MEDIUM RISK PRICE Rs.1631 TARGET Rs.1960

Initiating Coverage

May 31, 2011 2

Larsen & Toubro Ltd.

COMPANY BACKGROUND L&T, one of the India’s largest Engineering Companies, was incorporated in February 1946. It was converted into a public limited company in 1950. L&T, along with its group companies, provides integrated design, engineering, procurement, construction and project management services to various sectors. The company is present in multiple operating segments such as Engineering & Construction (E&C), Electrical & Electronics (E&E), Machinery & Industrial Products (MIP) and others. It has exposure to infrastructure BOT projects in roads, ports and real estate. Through its subsidiaries like L&T Finance, L&T Infrastructure Finance and L&T Infotech, L&T has also diversified into financial services and the IT/ITeS sector. The E&C division of L&T undertakes engineering design and construction of buildings, factories, infrastructure, industrial and power transmission & distribution, while the E&E segment is engaged in manufacturing of electrical standard products, systems and equipment. The MIP division of L&T is focused on manufacturing industrial valves, construction and hydraulic equipment, machinery for mining, paper and rubber processing industry.

L&T is regarded as the preeminent infrastructure major – often referred to as the ‘builder of the India of the 21st century’. Its achievements across sectors include:

Hydrocarbon projects executed in India, the Middle East and South East Asia

Power projects executed in India, the Gulf and Sri Lanka.

The world’s largest coal gasifier made in India and exported to China

The world’s biggest EO Reactor for a petrochemical complex in the Gulf

The world’s largest FCC (Fluid Catalytic Cracker) Regenerator for a refinery

Asia’s highest viaduct

Infrastructure projects in Jordan, U.A.E. and South East Asia

The world’s longest limestone conveyor

India’s widest range of switchgear

A wide range of construction and mining equipment

L&T has diversified business portfolio and it operates through its different operating divisions which include:

Engineering & Construction Projects

EPC Power

Heavy Engineering

Engineering, Construction & Contracts

Electrical & Electronics

Machinery & Industrial Products

IT and Integrated Engineering Services

Financial Services

Engineering & Construction Projects: L&T delivers world-class ‘design to build’ EPC

solutions in the Oil & Gas, Petrochemicals, Fertilizer, Power and Water technology sectors. In-house expertise and experience is synergized with strategic partnerships. Single point solutions are offered for every phase of a project – right from front end engineering and design through fabrication, project management, construction and installation up to commissioning. L&T’s offerings are characterized by on-time delivery, cost-competitiveness, high quality standards with a focus on best in class HSE practices.

EPC Power: EPC Power division has strong engineering, procurement, construction and

project execution capabilities built, which underpin the foray into EPC for thermal power plants, especially coal-based generation projects. Its offerings comprise Supercritical Steam Generators, Steam Turbine Generators and Balance of Plant (BoP). The business organization which includes the joint venture companies with Mitsubishi Heavy Industries (MHI), Japan, is geared to address the opportunities whichever way tendered by the customers. The customer profile comprises state utilities, private sector IPPs and large corporate seeking to build captive generation capacity.

May 31, 2011 3


Heavy Engineering: Heavy Engineering division manufactures and supplies customized &

engineered critical equipment & systems to core sector industries like Fertilizer, Refinery, Petrochemical, Chemical, Oil & Gas, Thermal & Nuclear Power, Aerospace and Defense. Its Ship-Building business covers construction of specialized commercial vessels, warships and submarines for the Indian Navy as well as vessels for the Indian Coast Guard. The business will also include repair and refit of ships and submarines.

Engineering, Construction & Contracts: Its Engineering, Construction and Contracts

division (ECCD) undertakes engineering design and construction of infrastructure, buildings, factories, water supply & metallurgical and material handling projects covering civil, mechanical, and electrical and instrumentation engineering disciplines. With many of the Country’s prized landmark constructions to its credit, ECCD, India’s largest construction organization, uses state of- the-art design tools and project management techniques. Supported by a track record of over 65 years covering all types of buildings, industrial sectors & infrastructure development, the division undertakes lump-sum turnkey construction with single-source responsibility.

Electrical & Electronics: This division comprises Electrical and Automation Operating

Company (EAOC) and Medical Equipment & Systems (MED). The four strategic business units under EAOC are Electrical Standard Products (ESP), Electrical Systems & Equipment (ESE), Control & Automation (C&A) and Metering & Protection Systems (MPS).

Machinery and Industrial Products: This division consists of Industrial Products &

Machinery Operating Company (IPMOC) and Construction Machinery Business Sector (CMBS). IPMOC has two distinct business streams - Industrial Products and Industrial Machinery. Industrial Products comprises industrial valves, welding products and cutting tools, while Industrial Machinery consists of machinery for pulp & paper, crushing, mining, mineral processing, steel and rubber & plastic processing industries.

IT and Integrated Engineering Services: L&T, through its wholly owned subsidiary, offers

comprehensive, end-to-end software solutions & services in industry verticals like BFSI, Energy & Petrochemicals, Manufacturing, and Product Engineering Services. Its key service areas are application maintenance & development, application outsourcing, legacy modernization, package implementations in SAP/Oracle, infrastructure management services and specialized services like data warehousing & business intelligence. These have been augmented by newer offerings like testing services, consulting services, business analytics and system integration.

Financial Services: Through its wholly owned subsidiary - L&T Finance Holdings Ltd, L&T

consolidates its investments in financial services and gives a distinct identity to the business segment. L&T Finance Holdings Ltd is the holding company for L&T’s investments in non-banking financial companies, mutual funds and a few other strategic investments in the sector. It is registered with the Reserve Bank of India as a non-banking financial company.

Key Management Personnel Management Designation

A. M. Naik Chairman & Managing Director, L&T

Y. M. Deosthalee Whole-time Director & Chief Financial Officer

K. Venkataramanan Whole-time Director & President (E&C Projects)

K. V. Rangaswami Whole-time Director & President (Construction)

V. K. Magapu Whole-time Director & President (IT & Engg Services )

M. V. Kotwal Whole-time Director & President (Heavy Engineering)

Ravi Uppal CEO & MD (L&T Power Ltd)

R. N. Mukhija Whole-time Director & President (E&E Division)

J. P. Nayak Whole-time Director & President (MIP Division)

May 31, 2011 4


L&T’s BUSINESS STRUCTURE

May 31, 2011 5


L&T’s SECTOR-WIDE PRESENCE

INFRASTRUCTURE

HYDROCARBON

May 31, 2011 6


POWER

PROCESS

AEROSPACE & DEFENSE

May 31, 2011 7


SUBSIDIARY COMPANIES L&T Finance: L&T Finance (LTF), a wholly owned subsidiary of L&T Capital Holdings Ltd, is a

diversified NBFC with product offerings catering to diverse segments of the corporate and retail sectors. LTF has a growing presence in microfinance and is also engaged in the distribution of various financial products. LTF, with its pan India presence backed by a robust credit appraisal, operational and credit delivery model, is well equipped to cater to customers across the country.

L&T Infrastructure Finance Company Ltd: L&T Infrastructure Finance Company Ltd

(LTIFCL), a wholly owned subsidiary of L&T Capital Holdings Ltd, is a NBFC focused on financing of infrastructure projects, covering various sectors. LTIFCL leverages L&T’s domain knowledge in the engineering and construction fields to provide infrastructure financing solutions through a mix of debt, sub-debt, quasi-equity, & equity participation. It also offers project advisory and loan syndication services.

L&T Infotech: L&T Infotech, a wholly owned subsidiary of L&T, is a global IT services &

solutions provider to various industries. It offers comprehensive, end-to-end software solutions & services in industry verticals like BFSI, manufacturing, telecom, energy & petrochemicals, product engineering services. Its key service areas are application maintenance & development, application outsourcing, legacy modernization, package implementations in SAP/Oracle, infrastructure management services and specialized services like data warehousing and business intelligence.

Tractor Engineers Ltd: Tractor Engineers Ltd (TENGL) is a wholly owned subsidiary of L&T

principally engaged in manufacture of undercarriage systems for crawler machines, material handling systems like apron feeders and scrapper conveyors, mud pump spares and centrifugal pumps for the oil and gas sector. TENGL’s centrifugal pumps and mud pump expendables have wide usage in oil exploration.

L&T-MHI Turbine Generators Pvt Ltd: L&T has entered into Joint Venture with Mitsubishi

Heavy Industries, Japan (MHI) to manufacture super critical Steam Turbines & Generators (STG package). L&T-MHI Turbine Generators Pvt Ltd was formed in 2008 through L&T Power Ltd (a wholly owned subsidiary of L&T) holding 51% share to leverage on the parent company’s EPC capabilities in the emerging mega power sector. The JV is India’s first private sector company to set up manufacturing facilities for Supercritical Boilers and Turbine Generators at Hazira, Gujarat. The L&T-MHI facilities are among the largest of their kind in the world, with a present annual capacity of manufacturing 5,000 MW of equipment, to be expanded to 6,000 MW by 2012.

L&T Shipbuilding Ltd: L&T Shipbuilding Ltd (LTSB), a wholly owned subsidiary of L&T, has

been formed for setting up a shipyard cum minor port complex at Kattupalli, near Chennai. L&T has identified shipbuilding as a major thrust area in the heavy engineering sector for growth. The port complex of LTSB is expected to meet this requirement and is planned to operate on a commercial basis with a capacity of 2 mn TEUs per annum. LTSB has a Joint Venture agreement with TIDCO to set up the port and shipyard at Kattupalli, Tamil Nadu. The company has commenced construction activities from October 2009 and has also received the formal SEZ approval from the Ministry of Commerce and Industry.

Larsen & Toubro (Oman) LLC: Larsen & Toubro (OMAN) LLC (LTO), a Joint Venture with

Zubair Corporation LLC, provides engineering, construction and contracting services for the last 15 years in Sultanate of Oman. L&T, through its wholly owned subsidiary L&T International FZE, holds 65% in the company.

May 31, 2011 8


L&T Infrastructure Development Projects Ltd: L&T Infrastructure Development Projects

Ltd (L&TIDPL) has been set up as an infrastructure development arm of the group, where L&T has 84.27% stake. L&TIDPL, a holding company in this segment, works on a “value creation” model so that the Special Purpose Vehicle (SPV) floated for each infrastructure project is nurtured till it reaches a stage of matured operation. The company has built up capabilities in identifying and developing infrastructure projects, operation & maintenance of these projects and providing advisory services relating to financing & engineering of the projects. L&TIDPL portfolio is well diversified with a mix of projects under development across various sectors such as roads & bridges, ports, and urban infrastructure. L&T Urban Infrastructure Ltd., a subsidiary of L&TIDPL, houses the property development and urban infrastructure project development business.

Tamco Switchgear (Malaysia) SDN BHD: L&T, through its L&T International FZE, acquired

TAMCO Group in 2008 to strengthen its global offering in medium voltage switchgears to complement L&T Group’s established range of low voltage products. The TAMCO Group comprises of four companies. Companies operating from Malaysia, Australia and China are wholly owned by L&T International FZE, while the company operating from Indonesia is wholly owned by L&T International FZE and Tamco Switchgear (Malaysia) SDN BHD. The TAMCO Group has manufacturing facilities in each of these countries. TAMCO Malaysia has established its brand for Medium Voltage (MV) switchgear not only in the home country but also in Dubai, Qatar, Abu Dhabi, South and West African countries. The utility segment in the Gulf countries is also being well catered to apart from the foray in Indian markets.

ASSOCIATE COMPANIES Audco India Ltd: Audco India Ltd (AIL) is a joint venture with equal equity holding by L&T

and Flowserve Corporation, USA. It is a one of the leading manufacturers of Industrial valves and caters to all major industries viz Refineries & Pipelines, Power, Petrochemicals, Offshore Platforms, Chemicals, Fertilizers, Food & Pharmaceutical, etc. The valves manufactured by the company are approved and widely accepted by international oil majors such as Shell, Chevron, EXXON, Aramco, PDO, and ADCO, which helps AIL in participating in its worldwide projects. During FY10, its Revenues stood at Rs. 4,010 mn, while its Net profits stood at Rs. 320 mn.

L&T-Komatsu Ltd: L&T-Komatsu Ltd (LTK) is a joint venture with equal equity holding by L&T

and Komatsu Asia Pacific Pte. Ltd., Singapore, a wholly owned subsidiary of Komatsu Ltd, Japan, which is world’s largest manufacturer of hydraulic excavators and has manufacturing and marketing facilities worldwide. LTK is engaged in the manufacturing of hydraulic excavators and other associated hydraulic components. L&T markets and provides after sales support for hydraulic excavators manufactured by LTK.

The hydraulic equipment industry registered 6% growth during FY10 as against a sharp 28% decline during FY09. During FY10, LTK registered 3% growth in its Revenues to Rs. 11,100 mn, while in terms of the volume the growth was better at 5% arising from improved market share of models PC 71 & PC 130. However, its Net profits stood at Rs. 660 mn for FY10 compared to Rs. 190 mn for FY09, mainly due to favorable rupee parity against the Japanese Yen and implementation of cost optimization initiatives, which resulted in significant reduction in the material cost. L&T-Komatsu PC200-6 is the largest selling hydraulic excavator in the country in the 20-ton class. It has been deployed in various applications across the country and is very popular amongst both institutional and retail buyers.

EWAC Alloys Ltd: EWAC Alloys Ltd (EWAC), a company in which L&T has 50% stake, is a

renowned welding solutions provider. EWAC is formed as a joint venture between L&T and Messer Eutectic Castolin Group of Germany. EWAC is a market leader in the business of maintenance and repairs welding & welding solutions for conservation of global metal resources. L&T markets EWAC’s products in India with a strong dealer network.

May 31, 2011 9


INVESTMENT RATIONALE

Increased Outlay for Core Sectors in 12th Plan - A Big Opportunity for L&T Infrastructure, Power, & Petrochemicals are core sectors for India, where continued investments are expected to pour for next 5-10 years.

Infrastructure: The Indian economy has been able to grow at healthy rate of about 9% in

recent years and to continue this growth momentum in upcoming years, we require strong base of Infrastructure such as electricity, railways, roads, ports, airports, irrigation, and urban and rural water supply and sanitation etc., which can be achieved through adequate investment. The expected investment required by the central & state governments and the private sector for sustaining a growth rate of 9% in GDP over the 11

th Plan (2007-12)

amounts to USD 514 bn and an average of 7.6% of GDP during the 11th

Plan as a whole. With increased thrust on building Infrastructure, the Government has set an ambitious target of increasing total investment in Infrastructure from ~7.0% of GDP currently to ~10% of GDP during the 12

th plan (2012-17), which amounts to USD 1,000 bn (Approx. 2.0x amount

targeted for 11th

plan), and nearly 50% are envisaged to be financed through private sectors. The outlay for infrastructure in FY12 has also been stepped up by 23.3% to Rs. 2,140 bn, which is 48.5% of the plan expenditure. Projected Share of Investment in Infrastructure during Eleventh Plan (at 2006-07 Price):

Source: Planning Commission

0

2000

4000

6000

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

(Rs.i

n bn)

Projected Investment in

Infrastructure during 11th Plan

May 31, 2011 10


Power: India is also facing huge energy deficit and as per Central Electricity Authority's (CEA)

monthly review of the power, the energy deficit and peak power deficit for April 2011 was approximately 7.6% and 10.8%, respectively. The shortages have been primarily due to the sluggish progress in capacity addition. The capacity addition likely during 11

th Plan (2007-

2012) as per mid-term appraisal of planning commission is about 62,374 MW, and as of April 30, 2011, capacity addition has been about 42,032 MW with total installed power generation capacity of 174,361.4 MW. A tentative capacity addition of approx. 100,000 MW has been envisaged for the 12

th Plan. The total fund requirement to achieve the above targeted

capacity addition is estimated at Rs. 11,000 bn. The MoP's proposed sector-wise and mode-wise capacity addition for the 11th Plan is as follows:

Thermal Nuclear Hydro Total

Central 24,800 3,380 8,654 36,834

State 23,301 0 3,482 26,783

Private 11,552 0 3,491 15,043

Total 59,653 3,380 15,627 78,660 (Source: CEA Monthly Review (April 2011))

Oil & Gas: Oil accounts for about 31% of India’s total energy consumption and there is

unlikely to be any significant scaling down of dependence on these fuels in the next 5-10 years. The Government introduced New Exploration Licensing Policy (NELP) in 1997 to encourage the private sector to invest in exploration of oil and currently, about 58% of the prospective Indian sedimentary basins have been explored and till the Ninth round of NELP, there were 34 oil & gas blocks on offer. India has about 138 bn barrels of oil & oil equivalent gas and bulk of this has not been found yet. According to data released by the Ministry of Petroleum and Natural Gas, dated March 2011, Crude Oil production for FY11 was 37.712 MMT, while Natural Gas production was 52.2 billion cubic metres (BCM). During FY11, 164.85 MMT of crude oil was refined against 160.03 MMT in FY10. The gas production is expected to rise from about 52 BCM in FY11 to a 95 BCM by 2019, while gas consumption is set to rise to 110 BCM by FY14, with domestic supply up from around 52 BCM in FY11 to at least 70 BCM.

Defense: After Government of India’s decision to open up Defense production to the private

sector, L&T has been issued industrial licenses for a wide range of products. L&T has been a major supplier of critical systems to India’s defense forces for two decade. Though, the pace of policy initiative by Government for private sector participation in Defense sector has been very slow, L&T has continuously strengthen its position and very well equipped to participate meaningfully in the country’s defense production program in coming years. The licenses issued to L&T cover design, development, construction/manufacturing and assembly of Warships, Submarines, Weapon platforms, High-speed boats and crafts, Radars, Sonar systems, Electronic Warfare equipment & System Sensors, Arms and Armament including Weapon Launchers, Armored and Combat vehicles, Airborne assembly systems & equipment for Aircrafts, Helicopters and Unmanned Aerial Vehicles and equipment for aviation sector.

Railways: L&T has expertise in delivering integrated Railway Projects involving construction

of formation, bridges, track, signaling, etc, in a comprehensive and cost effective manner. L&T represents a single source solution for varied requirements of complex and integrated railway projects. L&T is the largest E&C Company in India with strong presence across core sectors such Power, Infrastructure & Hydrocarbon etc. and it has played a major role in execution of several large projects in for decades. Going forward, with huge investments expected in core sectors for next 5-10 years, L&T, with its strong capabilities, long track record, and superior technology, is expected to capitalize most of imminent opportunities.

May 31, 2011 11


Strong Order-Book Position Provides Growth Visibility Over the years, L&T has been able to consolidate its leadership position in the engineering and construction business and has also explored newer business opportunities in the Nuclear and Railways sectors. It has a strong track record of executing several prestigious contracts in the Power, Hydrocarbon, Fertilizer, Infrastructure and Defense sectors. During FY2005-11, the company has recorded a strong CAGR of 32% in its order inflow and 34% in its order book position. While order inflows during FY11 grew at a relatively slower pace at 15% due to delay in decision making & project clearance across all the core sectors given the land acquisition issues, environmental clearance issues and other political issues during the last Six months, however, L&T witnessed a decent improvement in pace of award decisions in Infrastructure sector during Q4FY11. The Company expects majority of these orders to be awarded in early part of FY12 and expects 15-20% growth in order intake during FY12.

At the end of FY11 its order book position stood at of Rs. 1,302 bn. The current order book to its TTM Revenues Ratio of 3x provides strong growth visibility for next two years.

224306

420516

696798

917

1055

100

250

400

550

700

850

1000

1150

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Rs.

in b

n

Order Inflow Trend

Order Inflow

247 368.8 527703

1002

1302

1675

2088

1.7

2.1 2.1 2.1

2.73.0 3.1

3.3

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

500

1000

1500

2000

2500

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Rs.

in b

n

Order book Position Trend

Order Book at Year End Avg Order Book to Net Sales

May 31, 2011 12


Execution Picking-up in Infrastructure & Power Segments Infrastructure & Power sectors form 68% of its order book and L&T has witnessed pickup in execution of projects under these segments and expects significant contribution in Revenues in FY12 from these projects. Its long gestation BTG orders have also started to contribute to its revenues. Hence, with increased execution from Infrastructure & Power sectors, and strong order book, we expect L&T to deliver robust Revenue growth in ensuing period.

Decent Revenue Growth Outlook: L&T has delivered very decent growth during FY07-11

with standalone Revenues CAGR of 25.7%. With its strong order book and decent order pipeline, we expect L&T to deliver decent growth for next 2-3 years. Based on its FY11 performance & business growth outlook, we expect L&T’s Standalone Revenues to grow by 24% & 18% to Rs. 544.4 bn & Rs. 642.4 bn in FY12E & FY13E, respectively.

Source: Company, Sushil Finance Research Estimates

36%

32%

12%

16%

4%

Order book Break-up as on 31st Mar 2011

Infrastructure

Power

Hydrocarbons

Process

Others

175.7

250.1

339.4 370.3

439.0

544.4

642.4

150

250

350

450

550

650

750

FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Rs.

in b

n

Net Sales Growth (%)

May 31, 2011 13


EBITDA Margins to remain strong at 12% plus in FY12: Its EBITDA margins expanded

from 10% in FY07 to 12.8% in FY11. However despite of increase in cost of Raw Material and other expenses its EBITDA margins are expected to remain strong at 12% plus going forward. We expect its margins to be 12.4% & 12.3% in FY12E & FY13E respectively.


Healthy Profit Margins: L&T has delivered decent growth in its net profits during FY07-11.

During the period, its standalone APAT delivered a CAGR 27.2%. Its APAT margins remained healthy at 8.3% during FY11 and going forward it is expected to be maintained at 8% level. We expect L&T’s Standalone APAT to grow by 22.6% & 16% to Rs. 44.4 bn & Rs. 51.6 bn in FY12E & FY13E, respectively.


17.6 29.7

39.2 48.2

56.2 67.6

78.7

10.0%

11.9% 11.6%

13.0% 12.8%12.4% 12.3%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

10

20

30

40

50

60

70

80

90


Rs.

in b

n

EBITDA EBITDA %

13.9 20.9

27.1 31.7

36.2

44.4 51.6

7.9%8.3%

8.0%8.5% 8.3% 8.2% 8.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

10

15

20

25

30

35

40

45

50

55


Rs.

in b

n

APAT APAT %

May 31, 2011 14


Business Restructuring Plan for Value Unlocking & Higher Growth L&T also intends to restructure its different businesses under nine empowered business entities, which include the building & factories, infrastructure, heavy engineering & systems, industrial projects & water, electrical construction, hydrocarbons, electrical & automation, mechanical & industrial products and power equipment with separate boards for each entity comprising of experts in the field. L&T also plans to list these entities in the future, once they gain critical mass and required maturity. Its subsidiary L&T Finance Holdings Ltd has already filed prospectus with SEBI for its IPO of Rs. 17.5 bn. In line with its restructuring plan, Board of Directors of L&T recently has approved, seeking of shareholders approval for transfer of the electrical & automation (E&A) business to a subsidiary and/or associate company or to any other entity. By this restructuring, L&T aims for an ambitious target to grow its business four times in the next ten year. These steps, in our opinion, will not only lead to a stronger balance sheet and accelerated business growth and but will also lead to value unlocking & high shareholders wealth creation.

Healthy Balance position: L&T has a strong balance sheet with high cash & cash

equivalent to the tune of ~Rs. 90 bn as on Mar’11. It has very comfortable debt-equity (D/E) ratio of about 0.3.


RISKS & CONCERNS

High Interest, Inflation & Commodity Prices: Inflation, Interest Rates, Commodity & Oil prices are already at higher level. Any sharp increase in these items may reduce overall pace of growth. Deferment of Orders Due to Regularity Clearance: Due to several regulatory clearances such as environment, land acquisition may delay the flow of projects as well as decision making process. Shortage of Coal & Gas: the shortage of coal & gas may affect expansion of thermal power & fertilizer production capacity.

OUTLOOK & VALUATION Considering its strong order book position and decent growth expected in order inflows during FY12 along with pick up in execution of its infrastructure & power projects, we expect L&T to deliver decent growth for next 2-3 years. Based on its FY11 performance & business growth outlook, we expect L&T’s Net Revenues to grow by 24% & 18% to Rs. 544.4 bn & Rs. 642.4 bn in FY12E & FY13E, respectively, while its EBITDA to grow by 20.2% & 16.5% to Rs. 67.6 bn & Rs. 78.7 bn in FY12E & FY13E, respectively and its EBITDA margins to decline by 40 bps & 10 bps to 12.4% & 12.1 % in FY12E & FY13E, respectively. The CMP of Rs.1631 discounts its FY12E & FY13E consolidated EPS of Rs.85.1 & Rs.98.6 by 19.2x & 16.5x, respectively.

20.8 35.8

65.6 68.0 71.6 77.4 85.1

0.4 0.4

0.5

0.4 0.3 0.3 0.3

0.1

0.2

0.3

0.4

0.5

0.6

0

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40

60

80

100


Rs

in b

n

Total Debt D/E Ratio

May 31, 2011 15


Sum of Parts (SOTP) Based Valuation: We initiate coverage with a FY12 target of Rs. 1,960

based on sum of the part (SOTP) method, which include value of its subsidiaries, joint ventures and associate companies.

L&T Standalone: During FY11, L&T’s Standalone Revenues grew by 18.6% to Rs. 439 bn from

Rs. 370.3 bn during FY10, while its Adjusted Profits after Tax (APAT) grew by 14.5% to Rs. 36.2 bn from Rs. 31.7 bn during FY10. Going forward, we expect its APAT to grow at CAGR of 19.3% for next two years.

L&T Finance: During FY11, LTF delivered decent performance in comparison to the preceding

financial year. Its total Networth grew by 54% to Rs. 17,320 mn on March 31, 2011, while its total Income grew by 45% to Rs. 13,980 mn and Net profits grew by 47% to Rs. 2,300 mn. Going forward, we expect its Net Profit to grow by 36.8% & 30.7% in FY12E & FY13E respectively, while its ROE to be maintained at ~20% level.

L&T Infrastructure Finance Company Ltd: with its strong focus on returns & asset quality

and efficient liability & interest cost management, LTIFCL delivered decent performance during FY11. Its total Networth grew by 27% to Rs. 12,880 mn on March 31, 2011, while its total Income grew by 56% to Rs. 7,040 mn and its Net Profits grew by 81% to Rs. 2,010 mn. Going forward, we expect its Net Profit to grow by 35.8% & 30% in FY12E & FY13E respectively.

L&T Infotech: During FY11, L&T Infotech has achieved total Revenues of Rs. 24,580 mn

compared to Rs. 19,110 mn during FY10, registering a growth of 29%, while its Net profits grew by 15% to Rs. 3,210 mn from Rs. 2,800 mn during FY10. Going forward, we expect its Net Profit to grow at CAGR of 16% for next two years.

Larsen & Toubro (Oman) LLC: L&T, through its wholly owned subsidiary L&T International

FZE, holds 65% in Larsen & Toubro (Oman) LLC. During CY09, its total Revenue of stood at Rs. 15467 mn as against Rs. 14887 mn during the CY08, registering a growth of 4%, while its Net Profits stood at Rs. 988.9 mn as against Rs. 567.9 mn during the CY08, registering a growth of 74%. Going forward, we expect its Net Profit to grow at CAGR of 23% for three years.

L&T IDPL: L&T IDPL, which is engaged in the execution of several development projects in

roads & bridges, Power, ports, metro rail & other urban infrastructure projects is currently working on projects worth Rs. 627 bn. The total equity commitment as on March 31st 2011 for these projects is about Rs. 125 bn and L&T has invested about Rs. 38 bn. We expect its equity investment from L&T to increase to Rs. 58.5 bn by FY12.

JVs & Associates: During FY11, the contribution of JVs & Associates of L&T to its

consolidated Net Profits stood Rs. 870.7 mn compared to Rs. 1059.5 mn during FY10, registering a decline of 17.8%. However, going forward, we expect contribution of JVs & Associates of L&T to grow at CAGR of 25% for next two years.

SOTP Valuation

Valuation Multiple FY12E Profits/Book

Value (Rs. in mn) Valuation

(Rs. in mn) Value/Share

(Rs/share)

L&T Standalone 20xFY13E Profits 49,205* 984,105 1616.3

L&T Infotech 14xFY13E Profits 4,326 60,568 99.5

L&T Finance 1.5xFY13E BV 24,742 37,113 61.0

L&T Infra Finance 1.5xFY13E BV

18,437 27,655 45.4

L&T IDPL 58,500# 96.1

L&T Oman 10xCY12E Profits 1,192 11,915 19.6

JVs & Associates 10xFY13E Profits

1,360 13,605 22.3

SOTP based Target 11,93,462 1,960

* Adjusted for Dividend from S&A Companies and Profit on sale of investments # At expected equity investment from L&T by FY12

May 31, 2011 16


# At expected equity investment from L&T by FY12

PROFIT & LOSS (STANDALONE) Rs.mn

Y/E March FY10 FY11 FY12E FY13E

Total Sales 370,348 439,049 544,371 642,358

Total Raw materials 173,297 212,716 267,100 313,292

COGS 197,918 242,564 303,813 356,430

Personnel Cost 23,791 28,845 35,191 42,230

Sales Admin Exp. 13,866 19,662 23,987 28,425

EBITDA 48,156 56,226 67,607 78,747

Depreciation 4,146 5,992 7,490 8,988

Interest Cost 5,053 6,474 7,768 8,934

Other Income 9,103 11,949 14,338 16,489

Exceptional Item 10,748 2,621 0 0

EBT (as reported) 58,807 58,329 66,687 77,314

Tax 16,409 19,459 22,248 25,764

PAT 42,398 38,871 44,438 51,550

Extraordinary Items 1,357 708 0 0

RPAT incl. Extra-ord.items 43,755 39,579 44,438 51,550

Adjusted PAT (APAT) 31,650 36,250 44,438 51,550

BALANCE SHEET (STANDALONE) Rs.mn

As on 31st

March FY10 FY11E FY12E FY13E

Equity Share Capital 1,204 1,218 1,231 1,241

Application money 251 251 251 251

Reserves 181,661 210,911 243,830 283,767

Net worth 183,116 212,379 245,311 285,259

Secured loans 9,557 10,274 11,096 12,206

Unsecured loans 58,451 61,374 66,283 72,912

Total loans 68,008 71,648 77,379 85,117

Deferred tax liability 774 2,630 2,805 3,055

Capital Employed 251,899 286,657 325,496 373,431

Net block 54,916 66,030 76,665 85,986

CWIP 8,742 8,500 7,500 7,000

Investments 137,054 150,054 164,054 186,054

Inventories 77,234 91,909 105,695 121,550

Sundry debtors 111,637 132,848 159,418 188,113

Cash and bank 14,319 17,438 18,101 20,232

Loans and advances 60,426 70,698 81,303 93,499

Total Current assets 263,616 312,894 364,517 423,393

Total Current liabilities 212,429 250,821 287,240 329,002

Net Current assets 51,188 62,073 77,277 94,391

Total Assets 251,899 286,657 325,496 373,431

FINANCIAL RATIO (STANDALONE)

Y/E March FY10 FY11E FY12E FY13E

Growth (%)

Net Sales 9.1 18.6 24.0 18.0

EBITDA 22.8 16.8 20.2 16.5

APAT 16.8 14.5 22.6 16.0

Profitability (%)

EBIDTA Margin (%) 13.0 12.8 12.4 12.3

Net Profit Margin (%) 8.5 8.3 8.2 8.0

ROCE (%) 19.9 18.8 19.8 20.1

ROE (%) 20.6 18.3 19.4 19.4

Per Share Data (Rs.)

EPS 52.6 59.5 72.2 83.1

CEPS 79.5 77.6 84.7 98.0

BVPS 304.1 348.8 398.7 459.8

Valuation

PER (x) 31.0 27.4 22.6 19.6

PEG (x) 2.3 2.1 1.1 1.3

P/BV (x) 5.4 4.7 4.1 3.5

EV/EBITDA (x) 18.7 16.0 13.3 11.3

EV/Net Sales (x) 2.4 2.0 1.7 1.4

Turnover

Debtors Days 105 102 98 99

Creditors Days 312 314 293 287

Gearing Ratio

D/E 0.4 0.3 0.3 0.3


CASH FLOW STATEMENT(STANDALONE) Rs.mn

Y/E March. FY10 FY11E FY12E FY13E

Profit before tax & Extraordinary Items

42,398 38,871 44,438 51,550

Depreciation 3,224 4,195 5,243 6,292 Change in Deferred Tax Liability

289 1,856 175 250

Change in WC 11,434 (7,766) (14,541) (14,983) (Change in Misc. Exp. 3 0 0 0 Cash Flow from Operating

57,348 37,155 35,315 43,109

Change in Gross PP&E (16,996) (15,309) (15,878) (15,613) Change In WIP 2,061 242 1,000 500 Change In Investments (54,416) (13,000) (14,000) (22,000) Cash Flow from Investing

(69,351) (28,067) (28,878) (37,113)

Change in Debt 2,448 3,639 5,732 7,738 Change in Share Capital 33 13 13 10 Change in Other Reserve (33,768) (28,541) (32,919) (39,937) Change in other equity (2,357) 0 0 0 Change in application 251 0 0 0

Change in Reserves 26,824 708 0 (0)

Dividend (8,630) (10,329) (11,519) (11,613) Cash Flow from Financing

18,570 (5,968) (5,775) (3,865)

Cash at the End of the Yr 14,319 17,438 18,101 20,232

May 31, 2011 17


PROFIT & LOSS (CONSOLIDATED) Rs.mn

Y/E March FY10 FY11 FY12E FY13E

Total Sales 439,698 520,891 642,564 755,280

Total Raw Materials 182,105 225,875 283,284 331,903

COGS 231,143 286,217 355,980 416,422

EBITDA 64,387 77,575 93,425 108,437

Depreciation 9,793 13,189 16,126 18,919

Interest Cost 6,919 8,309 9,970 11,466

Other Income 7,596 9,191 11,305 13,759

Extraordinary Items 18,183 2,053 0 0

EBT (as reported) 73,454 67,322 78,634 91,811

Tax 20,388 23,554 26,480 30,878

PAT 53,066 43,768 52,154 60,934

Min. Int. 975 786 864 951

Share in gain/loss of assoc.

1,060 871 1,088 1,360

PAT 53,066 43,768 52,154 60,934

Extraordinary Items 1,357 708 0 0

RPAT incl. Extra ordinary item

54,507 44,562 52,378 61,344

Adjusted PAT (APAT) 34,968 41,800 52,378 61,344

BALANCE SHEET (CONSOLIDATED) Rs.mn

As on 31st

March FY10 FY11E FY12E FY13E

Equity Share Capital 1,204 1,218 1,231 1,244

Other equity items 3,244 3,568 3,925 4,317

Application money 251 289 317 349

Reserves 205,214 239,446 280,305 330,008

Net worth 209,913 244,520 285,778 335,918

Minority Interest 10,873 10,260 10,773 11,312

Total loans 226,561 326,927 384,652 452,774

Deferred tax liability 1,530 3,110 3,335 3,625

Capital Employed 468,389 629,937 731,914 853,373

Gross Block 161,081 241,622 285,114 336,434

Depreciation 37,476 46,049 58,949 74,085

Net block 123,605 195,573 226,164 262,350

CWIP 66,184 80,000 90,000 95,000

Investments 99,279 119,134 131,048 144,153

Inventories 23,782 29,728 35,673 42,808

Sundry debtors 125,280 156,600 191,052 229,262

Cash and bank 33,216 31,314 30,379 30,016

Loans and advances 160,299 200,373 236,440 288,457

Other Current Assets 74,433 89,319 102,717 118,125

Total Current assets 417,009 507,335 596,262 708,668

Total Current liabilities 237,689 272,105 311,560 356,797

Net Current assets 179,321 235,230 284,702 351,871

Total Assets 468,389 629,937 731,914 853,373

FINANCIAL RATIO STATEMENT (CONSOLIDATED)

Y/E March FY10 FY11E FY12E FY13E

Growth (%)

Net Sales 8.5 18.5 23.4 17.5

EBITDA 28.1 20.5 20.4 16.1

APAT 16.5 19.5 25.3 17.1

Profitability (%) EBIDTA Margin (%) 14.6 14.9 14.5 14.4

Net Profit Margin (%) 8.0 8.0 8.2 8.1

ROCE (%) 10.1 8.1 8.1 8.0

ROE (%) 20.0 18.4 19.8 19.7

Per Share Data (Rs.) EPS 58.1 68.7 85.1 98.6

CEPS 106.7 97.2 111.7 129.5

BVPS 348.6 401.6 464.4 540.2

Valuation PER (x) 28.1 23.8 19.2 16.5

PEG (x) 2.1 1.3 0.8 1.0

P/BV (x) 4.7 4.1 3.5 3.0

EV/EBITDA (x) 16.9 15.2 13.2 12.0

EV/Net Sales (x) 2.5 2.3 1.9 1.7

Turnover Debtors Days 100 99 99 102

Creditors Days 352 325 299 293

Gearing Ratio D/E 1.1 1.3 1.3 1.3


May 31, 2011 18


Rating Scale This is a guide to the rating system used by our Equity Research Team. Our rating system comprises of six rating categories, with a corresponding risk rating.

Risk Rating

Risk Description Predictability of Earnings / Dividends; Price Volatility

Low Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%

Accumulate 10 % to 15 % 15% to 20% 20% to 25%

Hold 0% to 10 % 0% to 15% 0% to 20%

Sell Negative Returns Negative Returns Negative Returns

Neutral Not Applicable Not Applicable Not Applicable

Not Rated Not Applicable Not Applicable Not Applicable

Please Note

Recommendations with “Neutral” Rating imply reversal of our earlier opinion (i.e. Book Profits / Losses).

** Indicates that the stock is illiquid With a view to combat the higher acquisition cost for illiquid stocks, we have enhanced our return criteria for such stocks by five percentage points.

Additional information with respect to any securities referred to herein will be available upon request. This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated, published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell any securities mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or complete. All expressions of opinion are subject to change without notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.

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