Larsen Outlook

8/13/2019 Larsen Outlook

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CMP: INR1,396 TP: INR1,721 Buy

Larsen & ToubroBSE SENSEX S&P CNX

18,719 5,656

What can support FY14 margins? Analyzing possibilitiesCircumspect about nature of project wins; medium term margins at risk

In FY13, L&T's E&C EBITDA margin declined 110bp (v/s guidance of +/-50bp) to 12%.

The margin contraction, particularly in 4QFY13, led to sharp volatility in stock price,

with L&T underperforming the Sensex by 6% over last one month.

For FY14, management has guided for stable E&C EBITDA margins. We model E&C

EBITDA margin decline of 75bp in each of FY14 and FY15, driven by the increasing

competitive intensity, constrained environment and higher share of overseas

projects.

We crystal gaze the possibilities that can support margins in FY14. Both the factorsthat impacted margins in FY13 (increased contribution of overseas business and

new project start-ups in domestic market not crossing the 25% margin recognition

threshold) are likely to turn favorable in FY14.

We continue to remain circumspect about the margin profile of overseas orders,

given possibilities of poor fixed cost absorption and learning curve associated with

new geographies and new segments. Also, large size orders would increase

concentration risks. The skeptism is also driven by our own lack of understanding on

several of these variables.

L&T is exposed to several levers across business/geographic segments and has

emerged as the E&C partner of choice in India. This gives it a solid foundation to

capitalize on the next leg of the investment cycle. We remain positive on L&T's

longer term prospects.

Maintain Buy, with an SOTP-based price target of INR1,721.

1

20 June 2013

Update | Sector: Capital Goods

Satyam Agarwal ([email protected]); +91 22 3982 5410

Deepak Narnolia ([email protected]) / Nirav Vasa ([email protected])

Investors are advised to refer through disclosures made at the end of the Research Report.

Shareholding pattern %

As on Mar-13 Dec-12 Mar-12

Dom. Inst 36.3 36.8 36.6

Foreign 21.0 21.0 19.7

Others 42.7 42.3 43.7

Bloomberg LT IN

Equity Shares (m) 612.0

M.Cap. (INR b)/(USD b) 854.4/14.3

52-Week Range (INR) 1,720/1,308

1,6,12 Rel. Perf. (%) -6/-9/-7

Financials & Valuation (INR b)

Y/E March 2013 2014E 2015E

Sal es 614.7 689.8 805.0

EBITDA 64.1 75.0 83.5

Adj PAT* 49.3 48.9 56.7

EPS (INR)* 80.6 79.8 92.6

EPS Gr. (%) 3.3 -0.9 16.0

BV/Sh (INR) 476.2 527.3 590.2

RoE (%) 16.2 15.0 15.0

RoCE (%) 14.3 12.8 12.8

Payout (%) 28.0 28.9 28.9

Valuations

P/E (x)* 18.3 17.5 15.1

P/BV (x) 3.1 2.6 2.4EV/EBITDA (x) 14.4 12.2 11.4

Div Yield (%) 1.3 1.4 1.6

*Consolidated

Stock performance (1 year)

Contribution of overseas business in revenues expected to stabilize at 18.2%

% YoY FY12 FY13 FY14E

Order intake (FY13 driven by domestic)

Domestic -24.6 27.3 2.0 Domestic intake growth in FY13 was higher than

Overseas 215.1 14.2 33.0 overseas; unlike FY12 when the difference

was stark

Revenues (entire increase in FY13 by overseas)

Domestic 23.5 4.5 13.0 Healthy intake in FY13 likely to support FY14

Overseas 26.1 118.6 9.0 domestic revenues; while growth in overseas

business to normalize

Overseas Contribution (%)

Order intake 17.9 16.3 21.0 Contribution of overseas business to revenues

Revenues 9.9 18.6 18.2 increased sharply in FY13; should stabilize

in FY14

Project execution cycle in domestic market supporting margins: Domestic revenue

growth declined sharply from 24% in FY12 to just 4.5% in FY13. New projects that did not

cross the 25% margin threshold accounted for a higher share of overall revenue. We

believe a large part of these projects should cross the threshold in 2HFY14, leading to

margin expansion. However, 1HFY14 margins could still remain constrained.

Twin factors that impacted FY13 margins likely to turn favorable in FY14



Larsen & Toubro

20 June 2013 2

Factors that impacted FY13 margins to support FY14 margins

FY13 E&C margins were impacted by (1) increase in share of overseas business

from 10% of revenue in FY12 to 19%, and (2) new project start-ups in the domestic

segment not crossing the 25% margin recognition threshold.

In FY13, domestic revenue grew just 4.5%, while overseas revenue grew 119%.This is largely a reflection of the order intake trend in FY12 - overseas intake was

up 215% while domestic intake declined 25%. In FY14, we expect domestic revenue

to grow 13% and overseas revenue to grow 9%, again a reflection of the 27%

increase in domestic intake in FY13 v/s 14% increase in overseas intake. We expect

overseas contribution to remain at 18-19% in FY14, similar to FY13 levels.

Domestic revenue growth declined sharply from 24% in FY12 to just 4.5% in FY13.

New projects that did not cross the 25% margin threshold accounted for a higher

share of overall revenue. We believe a large part of these projects should cross

the threshold in 2HFY14, leading to margin expansion. However 1HFY14 margins

could still remain constrained.

Constrained ordering in FY12 impacted domestic revenue in FY13; expect overseas contribution to stabilize

In FY13, domestic revenue grew just 4.5%, while overseas revenue grew 119%. This is largely a reflection of the order intake

trend in FY12 - overseas intake was up 215% while domestic intake declined 25%. In FY14, we expect domestic revenue to grow

13% and overseas revenue to grow 9%, again a reflection of the 27% increase in domestic intake in FY13 v/s 14% increase in

overseas intake. We expect overseas contribution to remain at 18-19%, similar to FY13 levels.

Domestic order intake healthy in FY13, but several projects did not cross margin recognition threshold

Domestic revenue growth declined sharply from 24% in FY12 to just 4.5% in FY13. New projects that did not cross the 25% margin

threshold accounted for a higher share of overall revenue. We believe a large part of these projects should cross the threshold

in 2HFY14, leading to margin expansion.

Source: Company, MOSL

Domestic E&C segment (INR b) Overseas E&C segment (INR b)



Larsen & Toubro

20 June 2013 3

E&C margins in FY13 were impacted by the twin factors

E&C EBITDA margin has corrected 220bp from peak levels of 14.2% in mid-FY11 to 12% in FY13.

We expect a further 150bp margin contraction by FY15.

Source: Company, MOSL

Remain circumspect about risk profile of overseas projects

Some fruition of L&T's intent to increase its presence in overseas markets is

evident, with the company achieving pre-qualifications (PQs) in bidding for several

large projects:

Urban Transport: PQs (part of consortium) for two metro rail projects (Doha

and Riyadh Metro Rail; USD7b-8b each), freight corridor for Etihad Rail

(USD11b), etc.

Hydrocarbons: L&T has witnessed initial success, with orders of USD500m-

600m each from Saudi Arabia, Abu Dhabi and Oman in the last 18-24 months.Also, it received two orders of USD100m each from Thailand/Myanmar in 1QFY12/

3QFY13 - an important geography addition. While the expected intake from the

overseas market in FY13 was INR200b, the actual award was INR130b. Possible

order intake of INR250b in FY14 (according to the management) from the overseas

markets will entail a share of 1.5-2% in Middle East ordering, based on recent

aggregate ordering trends (refer to our update, Overseas Juggernaut, May 2013).

For L&T, a key structural trend is increasing contribution from the overseas

business (expected to contribute ~45% of FY14 consolidated EPS), led by E&C and

also IT/IES businesses. For the overseas E&C business, we remain skeptical on

margins and risk profile. Competitive intensity remains high and the management

has stated that overseas orders would yield significantly lower margins (~8%)

than domestic orders (~12%). Given the initial learning curve in segments like

metro rail, railways, etc, and new geographies, initial margins could remain

volatile. Also, large size orders would increase concentration risks. This structural

trend makes us more circumspect on the possible risk profile, also driven by our

own lack of understanding on several of these variables.

We model E&C EBITDA

margins to decline 75bps

each in FY14 and FY15.

However, there exist

possibilities that near

term margin will be

supported by twin factors

which impacted margins

in FY13

While the EBITDA

margins in overseas

business is meaningfully

lower at 8%, we

understand NPM is

possibly not

compromised given

lower tax rates and

better NWC cycle



Larsen & Toubro

20 June 2013 4

L&T: Gearing up the overseas juggernaut - possible 1.5-2% market share in Middle East v/s 0.25-0.5% in FY13!

Expect strong growth in overseas order intake in FY14 Ordering in Middle East remains constrained (TTM)

Source: MEED, Company, MOSL

L&T: Key order wins from Middle East

Period Details INR M Country

1QFY12 PTTEP International Limited - Zawtika Development Project,

Phase-1A 7,253 UAE

1QFY12 Construction of PO and LDPE plant for Technimont-Samsung JV 3,250 UAE

1QFY12 PTTEP International Limited - Zawtika Development Project,

Phase-1A 5,000 Myanmar

2QFY12 EPC pipeline work for gas project

(from Abu Dhabi Gas Industries) 8,390 UAE

2QFY12 EPC project for Field Development project from

Abu Dhabi Marine 19,620 UAE

2QFY12 PTTEP Intl, Thailand for Zawtika Development Project,

Phase-1A 1,160 UAE

2QFY12 Project order from Petroleum Development Oman LLC 7,000 Oma n

2QFY12 EPC job at Lekhwair Gas f ie ld Development Project for PDO 7,010 Oman

4QFY12 Procure & Construction of Solution Polyethylene &

Speciality Elastomers Package, Sadara Chemical Company Sa udi Arab ia

2QFY13 EPC of Saih Rawl Depletion Compression Ph 2,

Petroleum Development Oman LLC 13,020 Oman

3QFY13 Offshore EPC, installation and commissioning

project from Carigali Myanmar Hong Kong) Limited 5,500 Myanmar

1QFY14 Midyan Oil Fields, Saudi Arabia ~USD300m* Saudi Arabia

1QFY14 Batinah Expressway, Oman (Packages 4, 5, 6) ~USD1b# Oman* Press release does not state value of Saudi Aramco Midyan order; amount based on past

media articles;

# Based on media articles, L&T is L1 in these projects Source: Company, MOSL



Larsen & Toubro

20 June 2013 5

L&T: Operating Matrix

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Order Intake (INR b) 420 516 696 798 706 882 946 1,119

Growth (%) 37 23 35 15 -12 25 7 18

Process 63 80 90 128 78 53 61 70

Oil & Gas 105 62 139 56 78 89 134 174Power 59 129 230 255 148 264 264 330

Infrastructure 130 201 188 303 339 396 396 436

Others 63 41 49 56 64 79 91 109

Order Intake (INR b) 420 516 696 798 706 880 946 1,119

Domestic 361 450 661 718 579 730 746 879

Growth (%) 44 25 47 9 -19 26 2 18

Overseas 60 66 35 80 127 150 200 240

Growth (%) 8 11 -47 129 59 18 33 20

Order Book (INR B) 527 703 1,002 1,302 1,457 1,536 1,799 2,121

Growth (%) 43 33 43 30 12 5 17 18

Process 74 112 160 208 219 154 153 162

Oil & Gas 121 98 150 156 146 123 189 259

Power 84 155 301 417 408 430 501 606

Infrastructure 190 288 331 469 627 753 855 958

Others 58 49 60 52 58 77 101 137

BTB (x) 2.1 2.1 2.7 3.0 2.7 2.5 2.6 2.7

BTB (x) Ex-Power 2.1 2.0 2.3 2.4 2.4 2.4 2.5 2.6

BTB (x) E&C 2.7 2.5 3.1 3.4 3.1 2.8 3.0 3.0

BTB (x) E&C Ex-Power 2.7 2.4 2.7 2.8 2.7 2.6 2.8 2.9

Gross Revenues (INR b) 252 340 370 439 531 633 683 798

Growth (%) 41 35 9 19 21 19 8 17E&C 190 280 318 377 465 541 606 708

MIP 23 24 21 27 27 22 24 27

EBG 24 25 27 28 31 32 33 38

EBITDA Margin (%) 12.9 13.0 14.5 14.2 13.2 11.9 12.0 11.4

E&C 12.8 12.9 13.6 13.6 13.1 12.0 11.3 10.5

MIP 18.9 20.1 22.1 21.2 19.5 16.3 16.5 17.0

EBG 17.0 13.2 15.7 16.7 12.7 13.6 14.5 14.5

Standalone EPS* 34.8 46.0 51.4 55.8 66.4 67.8 70.5 78.4

Consolidated EPS 39.1 51.3 61.6 69.7 78.0 80.6 79.8 92.6

RoE (%) [Standalone] 22.0 21.7 17.4 16.6 17.8 16.2 15.0 15.0RoE (%) [Consolidated] 22.6 21.8 22.3 17.3 16.0 16.8 - -

Wkg. Capital(% of sales)# 7.1 9.3 5.5 6.7 12.0 15.5 17.2 19.9

# Adj for Subs Adv Source: Company, MOSL



Larsen & Toubro

20 June 2013 6

Financials and Valuation

Income Statement (INR Million)

Y/E March 2010 2011 2012 2013 2014E 2015E

Total Revenues 373,556 442,961 537,378 614,709 689,812 805,028

Growth Rate (%) 8.8 18.6 21.3 14.4 12.2 16.7

Excise Duty 3,208 3,902 5,673 5,976 7,282 8,498

Net Revenues 370,348 439,059 531,705 608,733 682,530 796,530

Growth Rate (%) 9.1 18.6 21.1 14.5 12.1 16.7

Manufacturing Expenses 285,374 334,681 410,202 479,524 531,150 627,124

Staff Cost 23,791 28,301 36,635 44,363 48,800 53,679

S G &A Expenses 13,789 19,778 22,230 20,775 27,592 32,201

EBITDA 47,394 56,299 62,639 64,071 74,989 83,525

Change (%) 21.6 18.8 11.3 2.3 17.0 11.4

EBITDA Margin (%) 12.8 12.8 12.2 10.5 11.0 10.5

Depreciation 3,797 5,905 6,817 8,185 9,354 10,089

EBIT 43,597 50,394 55,822 55,886 65,635 73,436Net Interest 5,053 6,193 6,661 9,824 11,500 11,000

Other Income 7,422 9,106 13,078 18,509 13,983 14,849

Non-recurring Other Income 2,280 2,369 305 0 0 0

Add: Trf to Rev. Res. 13 11 10 10 10 10

Profit before Tax 48,259 55,686 62,554 64,581 68,127 77,295

Tax 16,409 19,436 18,538 17,940 19,757 23,188

Effective Tax Rate (%) 34.0 34.9 29.6 27.8 29.0 30.0

Reported Profit 43,760 39,580 44,566 49,116 48,370 54,106

EO Adjustments 11,910 3,329 550 2,475 0 0

Adjusted Profit 31,850 36,250 44,826 47,327 48,370 54,106

Cons. Profit (Adj) 37,110 42,416 47,730 49,327 48,866 56,691

Growth (%) 23.5 14.3 12.5 3.3 -0.9 16.0

Balance Sheet (INR Million)

Y/E March 2010 2011 2012 2013 2014E 2015E

Equity Capital 1,204 1,218 1,224 1,224 1,224 1,224

Reserves and Surplus 181,912 217,245 251,005 290,203 321,459 359,949

Net Worth 183,116 218,463 252,229 291,427 322,683 361,173

Debt 68,008 71,611 98,958 88,342 120,000 120,000

Deferred Tax Liability 774 2,635 1,330 2,442 1,330 1,330

Capital Employed 251,899 292,708 352,517 382,211 444,013 482,503

Gross Fixed Assets 72,901 89,465 105,544 131,212 138,631 149,631Less : Depreciation 17,916 23,025 29,495 37,692 47,046 57,135

Add : Capital WIP 8,742 7,713 7,587 4,500 4,500 4,500

Net Fixed Assets 63,727 74,153 83,636 89,020 96,085 96,996

Investments 137,054 146,848 158,719 161,036 157,951 187,539

Inventory 14,154 15,772 17,766 20,641 20,476 23,896

Sundry Debtors 111,584 124,276 187,298 226,130 259,362 302,681

Cash & Bank 14,319 17,296 17,781 14,556 36,225 1,782

Loans & Advances 60,365 82,253 91,280 91,630 115,518 127,000

Other Current Assets 63,532 110,501 120,448 118,730 151,428 176,508

Current Assets 263,883 350,099 434,574 471,687 583,009 631,867

Current Liabilities 212,765 278,392 324,411 339,532 393,032 433,899

Net Current Assets 51,118 71,707 110,163 132,155 189,977 197,968

Capital Deployed 251,899 292,708 352,518 382,211 444,013 482,503

E: MOSL Estimates



Larsen & Toubro

20 June 2013 7

Financials and Valuation

Ratios

Y/E March 2010 2011 2012 2013 2014E 2015E

Basic (INR)

Adjusted EPS 52.9 59.5 73.2 77.3 79.0 88.4

Growth (%) 14.3 12.6 23.0 5.6 2.2 11.9

Consolidated EPS 61.6 69.7 78.0 80.6 79.8 92.6

Growth (%) 20.1 13.0 11.9 3.3 -0.9 16.0

Con. EPS (Fully Diluted) 61.6 69.7 78.0 80.6 79.8 92.6

Growth (%) 20.1 13.0 11.9 3.3 -0.9 16.0

Cash Earning per Share 59.8 69.4 84.7 90.7 94.3 104.9

Book Value 304.1 358.8 412.1 476.2 527.3 590.2

Dividend Per Share 12.5 14.5 16.5 18.5 19.8 22.1

Div. Payout (Incl. Div Tax ) % 27.6 28.4 25.3 28.0 28.9 28.9

Valuation (x)

P/E (Standalone) 19.1 17.7 15.8

P/E (Consolidated) 18.3 17.5 15.1

Price / CEPS 15.4 14.8 13.3

EV/EBITDA 14.4 12.2 11.4

EV/ Sales 1.4 1.3 1.2

Price / Book Value 3.1 2.6 2.4

Dividend Yield 1.3 1.4 1.6

Return Ratio (%)

RoE 17.4 16.6 17.8 16.2 15.0 15.0

RoCE 14.0 13.9 14.1 14.3 12.8 12.8

Turnover Ratios

Debtors (Days) 109.0 102.4 127.2 132.1 137.2 137.2

Inventory (Days) 13.8 13.0 12.1 10.4 10.8 10.8Asset Turnover (x) 1.5 1.5 1.5 1.6 1.6 1.7

Leverage Ratio

Current Ratio (x) 1.2 1.3 1.3 1.4 1.5 1.5

D/E (x) -0.2 -0.1 0.0 0.1 0.2 0.3

Cash Flow Statement (INR Million)

Y/E March 2010 2011 2012 2013 2014E 2015E

PBT before EO Items 48,259 55,686 62,554 64,581 68,127 77,295

Add : Depreciation 4,159 6,003 7,005 8,185 9,354 10,089

Interest 5,053 6,193 6,661 9,824 11,500 11,000

Less : Direct Taxes Paid 16,409 19,436 18,538 18,670 19,757 23,188

(Inc)/Dec in WC 11,407 -9,338 -34,431 -42,560 -19,343 -41,520

CF from Operations 52,469 39,107 23,250 21,360 49,881 33,675

(Inc)/Dec in FA -15,940 -16,429 -16,487 -11,920 -10,000 -11,000

(Pur)/Sale of Investments -32,811 9,972 4,108 28,620 10,000 0

Investment in subs -21,606 -19,766 -15,979 -10,253 -30,110 -29,587

Advances to subs -1,366 -9,598 -4,703 -1,797 -2,569 -2,569

CF from Investments -71,722 -35,822 -33,061 4,650 -32,679 -43,157

(Inc)/Dec in Net Worth 23,851 7,927 -979 -1,630 0 0

(Inc)/Dec in Debt 2,448 3,603 27,347 11,820 5,000 0

Less : Interest Paid 5,053 6,193 6,661 9,824 11,500 11,000

Dividend Paid 7,338 8,973 9,962 9,886 13,071 13,961

CF from Fin. Activity 13,908 -3,636 9,745 29,900 -19,571 -24,961

Inc/Dec of Cash 6,566 2,979 483 -3,891 -2,370 -34,442

Add: Beginning Balance 7,753 14,319 17,296 17,781 38,595 36,225

Closing Balance 14,319 17,298 17,779 13,891 36,225 1,782



Capital GoodsReport Gallery



Larsen & Toubro

20 June 2013 9

N O T E S



Motilal Oswal Securities LtdMotilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: [email protected]

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