institutional equity research larsen &...

Larsen & ToubroCMP* (Rs) 1,422

Upside/ (Downside) (%) 24

Bloomberg Ticker LT IN

Market Cap. (Rs bn) 1,993

Free Float (%) 100

Shares O/S (mn) 1,401

Capital Goods | India

Institutional Equity Research

Initiating Coverage | November 30, 2018

1

BUYTarget Price: Rs1,760

Share price (%) 1 mth 3 mth 12 mth

Absolute performance 12.8 5.3 16.8

Relative to Nifty 6.9 12.4 12.0

Shareholding Pattern (%) Mar'18 Jun’18

Promoter - -

Public 100 100

1 Year Stock Price Performance

Note: * CMP as on November 29, 2018

Research Analyst:

Arafat Saiyed

Contact: 022 3303 4635

Email: [email protected]

Rupesh Sankhe

Contact: 022 3303 4633

Email: [email protected]

Elephant Starts Running

Key Financials (Rs mn) FY18 FY19E FY20E FY21E

Sales 1,198,621 1,387,435 1,543,720 1,749,890

EBITDA 135,714 162,907 177,148 205,877

EBITDA Margin (%) 11.3 11.7 11.5 11.8

Net profit 73,699 87,869 99,952 116,422

EPS Rs) 52.6 62.7 71.3 83.1

P/E (x) 27.0 22.7 19.9 17.1

P/B (x) 3.6 3.2 2.9 2.6

EV/EBITDA (x) 23.1 19.8 18.6 16.5

ROE (%) 13.2 13.8 14.5 15.2

ROE (%) 13.2 16.3 16.3 16.9

Source: Company, RSec Research

We expect L&T to report strong order inflow in next couple of years led by multiple high-value orders including Bharatmala Pariyojana, SagarMala, bullet train and Metro rail. We believe L&T is well-placed to benefit from several big-ticket projects, as it satisfies all basic requirements i.e. balance-sheet size, strong track record, technical expertise and adequate liquidity to bid for such projects. We expect its revenue and earnings to clock 13% and 16% CAGR, respectively over FY18-21E. At CMP, the stock trades at 19.9xFY20E and 17.1xFY21E earnings. We initiate coverage on the stock with BUY recommendation and an SOTP-based Target Price of Rs1,760.

Healthy Order book: Current order book stands at Rs2,815 bn (2.3x of FY18 revenue). Order prospects remain healthy in FY19 at Rs4 trillion led by infrastructure orders of ~Rs2000 bn, Power T&D ~Rs950bn, MMH ~Rs15bn, hydrocarbon ~Rs800bn, and Heavy Engineering & Defense Rs100bn. GoI is planning to spend Rs7 trillion in next 5 years to develop 83,677km of roads including Bharatmala (Rs5.4 trln). L&T has reported strong 42% growth in order inflow during H1 FY19 at Rs780 bn; while the management has maintained its FY19 order inflow guidance at 10%-12% implying inflow to decline by ~10% in H2 FY19 due to general elections. We expect order inflow to grow at a CAGR of 12% during FY18-21. With India expected to invest significantly in infrastructure creation over the next few years, the company like L&T is in a sweet spot.

Earning momentum to sustain: We expect execution rate to stabilise led by incremental order inflows. We expect L&T’s EBITDA margin to expand to 11.8% in 21E from 11.3% in FY18, as various early stage projects in which progress is below required level to recognize EBITDA margin would reach their respective thresholds. We expect ROE to improve to 16.2% in FY21 from 13.2% in FY18 led by execution pick up and margin expansion. Strong cash flow led by stable working capital, lower equity commitment for developmental assets and monetisation of non-core assets augur well for L&T.

Divestment of Non-core Assets: In May’18, L&T announced sale of its E&A business to Schneider Electric for an all-cash consideration of Rs140bn. During last few years, the Company has monetised its investments in several asset-heavy businesses and JVs. It sold loss-making (loss of Rs1 bn) general insurance business, sold stakes in IT and tech services by IPO. Further, the Company is in final stage to sell its Kattupalli port.

Outlook & ValuationWe are positive on L&T led by strong execution in core E&C business with robust order inflow momentum led by strong performance of key segments i.e. Infrastructure and Hydrocarbon. The plan to exit part of development assets especially monetisation of Hyderabad metro in a long-term is positive, in our view. We expect its revenue and earnings to clock 13% and 16% CAGR, respectively over FY18-21E. At CMP, the stock trades at 19.9xFY20E and 17.1xFY21E earnings. We initiate coverage on the stock with BUY recommendation and an SOTP-based Target Price of Rs1,760.

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Larsen & ToubroInitiating Coverage | India


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CMP* (Rs) 1,422




Exhibit 1: Key SegmentRevenue (FY18) Order Inflow Order book

(Rs mn) Mix (%) CAGR (08-18) CAGR (18-21) Mix (%) Mix (%)Infrastructure 590,830 49.3 20.9 12.2 54.9 71.4

Building & Factories

Residential, Commercial, Airports, Factories

The B&F segment has remained challenging over last 2 years. The client base has shifted towards public sector, as private sector deferred the investment plans due to economic reforms. Implementation of RERA and GST are positive for industrial development in the long-term, in our view.

Transportation

Roads, Railways The Government of India (GoI) is planning to spend Rs7trln in next 5 years to develop 83,677km of roads including Bharatmala (Rs5.4 trln). The GoI plans to build 45km of road/day in FY19, (27km in FY18). The Ministry also mulls awarding orders for 20,000km of National Highways and constructing a total of 16,420km in FY19 (17,055 km of awards and 9,829 km constructed in FY18).

Heavy Civil Eng

Metro, Defence, Ports We expect heavy civil engineering segment to report strong growth in next few years led by various high-value orders including proposed bullet train between Mumbai and Ahmedabad, Bharatmala and SagarMala, river-linking projects and hydel projects etc.

Water & Effluent treatment

Water supply, Desalination, Water and Waste water treatment

The projects like National Mission for Clean Ganga (NMCG), Pradhan Mantri Krishi Sinchai Yojana (PMKSY) and Delhi-Mumbai Industrial Corridor (DMIC) project have augured well for this segment. Sector-specific focus is expected to shift towards rural drinking water and irrigation projects. Various water and irrigation projects are expected in Gujarat, Karnataka, UP, Bihar, TN, Rajasthan and Telangana.

Power Distribution

Transmission Lines, Substation

In last few years, India has seen strong capex in power distribution space led by Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA) and various distribution reforms by the SEBs for reducing AT&C loss and strengthening network. Urban power sector also witnessed strong growth in underground cable networks and advanced metering facilities. Currently, there are huge opportunities for EHV (Extra High Voltage) cabling projects in large cities.

Power 62,010 5.2 6.3 (0.5) 2.0 10.1

EPC, Boiler, Turbine and generator

The power sector has seen some recovery led by government initiatives like Ujwal DISCOM Assurance Yojana (UDAY), rural electrification programme and “Power for All” scheme. The opportunities for replacement demand and FGD systems are also visible in the near-term. On export front, South East Asia is expected to offer good opportunities for gas-based plant, which is likely to revive in the medium-term. The markets like Bangladesh, Sri Lanka, UAE and Indonesia also look promising for gas-based projects.

Heavy Engineering 38,450 3.2 6.3 (9.9) 5.5 3.6

Defence, Airospace. The global demand for oil started picking up towards the end of FY18, and continues till date. The outlook for the Process Plant sector looks optimistic with major capex expected in SEA, MENA and domestic market. The domestic market is improving led by capex by major players in petrochemical sector. Opportunities are abound for PSU oil marketing companies (OMCs) i.e. IOCL, HPCL, BPCL and HMEL for capacity enhancement and BS-VI up-gradation.

Hydrocarbon 117,360 9.8 8.1 18.6 13.0 5.9

Offshore, onshore, Process plant, fabrication Eng.

India has an ambitious plan to double its refining capacity to ~438 MMTPA by 2030. The demand for petrochemicals is expected to increase by 10 MMTPA by 2020. The PSU refineries have embarked upon capacity expansion plans, which offer opportunities for the onshore and construction services verticals. The GCC will see higher outlay for downstream and petrochemical projects, particularly in Saudi Arabia, the UAE and Kuwait. Saudi Aramco plans to spend >US$300 bn in next 10 years, while the UAE and Kuwait are planning to spend ~US$100bn each in next 5 years. We believe L&T is best placed to leverage these opportunities with its strong track record.

Electricals & Automation 52,090 4.3 7.5 11.9 4.0 1.3

Industrial automation, Electricals, Meters

The smart meter market is expected to grow led by SAUBHAGYA scheme. UDAY and other schemes like Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUJY) and Integrated Power Development Scheme (IPDS) are likely to ease the payment structure of the utilities. ‘Make in India’ initiative has given an edge over international suppliers. With the oil prices improving, investment in Oil & Gas sector of the GCC continues to improve.

Other Services 337,880 28.2 9.1 9.9 20.7 7.7

Financial Services, IT, Infotech and others

Source: Company, Rsec Research

Earning momentum to sustainWe expect L&T’s revenue and earnings to clock 13% and 16% CAGR, respectively over FY18E-21E on the back of a healthy order backlog. L&T – with its presence in all spectrum of infrastructure – is expected to reap the maximum benefit owing to strong order book.



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CMP* (Rs) 1,422




InfrastructureIn FY18, the Infrastructure segment contributed 71% of order backlog, 55% of order inflow and 49% to revenue. During last decade, this segment has been the key revenue driver clocking 21% CAGR. Looking ahead, we expect execution rate to stabilise led by incremental order inflows in B&F segment, while improved execution to drive ~12% revenue CAGR during FY18-21E.

Exhibit 2: Infrastructure Biz Clock 21% revenue CAGR over FY08-18 Exhibit 3: Infrastructure Biz – Average EBITDA Margin at 10.5% during FY13-18


We expect L&T’s EBITDA margin to expand meaningfully over FY18-21E, as various early stage projects in which progress is below required level to recognize EBITDA margin would reach their respective thresholds.

Power In FY18, power business contributed ~10% to L&T’s order backlog, accounted for ~2% and ~5% of total order inflow and revenue, respectively. The Company won major orders in EPC space led by large orders including Khargone TPP (2x660MW) in Madhya Pradesh, a steam generator order from NTPC at Tanda-II (2x660MW), EPC order for 2x660MW SSTP-II (Malwa) in MP and BoP for SSTP-I (2x600MW at Malwa). L&T also won some EPC contracts in Bangladesh for gas-based power plants.

Exhibit 4: Power Biz Clock 6 % revenue CAGR over FY08-18 Exhibit 5: Power Biz EBITDA Margin Declines to 3.4% in FY18


10.1

10.6 10.7

11.2

10.0 10.0

10.8 10.7

10.5

9

10

10

11

11

12

-

20,000

40,000

60,000

80,000

100,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Infrastructure (EBITDA, Rs mn) EBITDA Margin (%, RHS)

14.2

25.0

15.9

12.6

3.5 3.4 3.5 3.5 4.5

0

5

10

15

20

25

30

-

2,500

5,000

7,500

10,000

12,500

15,000

17,500


Power (EBITDA, Rs mn) EBITDA Margin (%, RHS)

42.7

5.5 6.1

41.2

53.2

22.5 18.0

12.7

6.7 10.9

16.8 15.1 11.5

0

10

20

30

40

50

60

-

200,000

400,000

600,000

800,000

1,000,000

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Infrastructure (Revenue, Rs mn) Growth (%, RHS)

0.7 0.4

66.7

12.6

(43.3)

(30.8)(22.7)

35.1

8.0

(10.5)

(27.5)

17.3 15.7

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-20

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20

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60

80

-

15,000

30,000

45,000

60,000

75,000

90,000

105,000

120,000

135,000

150,000

165,000


Power (Revenue, Rs mn) Growth (%, RHS)



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CMP* (Rs) 1,422




In FY18, revenue of power sector declined by 11% due to lack of orders. The downturn in power sector is attributable to increased debt of DISCOMs, which led to rising receivables for power producers. Going ahead, we expect order inflows to remain muted, while margin is likely to remain under pressure.

Heavy Engineering In FY18, heavy engineering segment contributed ~4% to L&T’s order backlog and accounted for ~6% and ~3% of total order inflow and revenue, respectively. Notably, segmental revenue clocked 6% CAGR over FY13-18. With the rising crude oil prices, we expect defence and aerospace sector to emerge as the key segmental growth drivers in the long-term.

Exhibit 6: Heavy Engineering Biz 6% revenue CAGR over FY08-18 Exhibit 7: Heavy Engineering Biz Margin Stabilises after dip in FY16


HydrocarbonAfter the one-time provisioning of cost overruns in FY15, the L&T’s hydrocarbon business is back on track led by order wins in gas segment for ONGC and at Saudi Aramco.

In FY18, the margin was back on track post completion of legacy order and short-cycle ONGC orders, which aided L&T to report in stabilising revenues and margin. As the bulk of legacy orders is behind, we expect L&T’s revenues and margin to improve, going forward. Order inflow received few big orders, which led to a strong 77% YoY growth in inflow. L&T secured large orders worth US$1bn from Saudi Aramco to develop a gas facility at Hasbah oilfields and another Rs40bn order for a large petrochemical facility in the Middle East. In addition, it has also received pipeline orders worth Rs17bn in West India and another Rs17bn order from ONGC for Neelam redevelopment.

Exhibit 8: Hydrocarbon Biz Clock 8% revenue CAGR overFY08-10 Exhibit 9: Hydrocarbon EBITDA Margin is Back on Track after dip in FY15


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(19.9)(10.2)

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Heavy Eng (Revenue, Rs mn) Growth (%, RHS)

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3.0

(15.4)

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(20)

(15)

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Hydrocarbon (EBITDA, Rs mn) EBITDA Margin (%, RHS)

17.7 15.6

12.1

(0.7)

19.5 17.1 18.1 18.5

(5)

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15

20

25

(1,000)

-

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8,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Heavy Eng (EBITDA, Rs mn) Margin (%)

0.6 0.0

(42.7)

76.6

16.3

(1.2)

(26.7)

16.0 11.7 22.1 28.0

12.5 15.8

(60)

(40)

(20)

0

20

40

60

80

100

-

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50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000


Hydrocarbon (Revenue, Rs mn) Growth (%, RHS)



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CMP* (Rs) 1,422




Healthy order book: Current order book stands at Rs2,815 bn (2.3x of FY18 revenue). Order prospects remain healthy in FY19 at Rs4 trillion led by infrastructure orders of ~Rs2000 bn, Power T&D ~Rs950bn, MMH ~Rs15bn, hydrocarbon ~Rs800bn, and Heavy Engineering & Defense Rs100bn. GoI is planning to spend Rs7 trillion in next 5 years to develop 83,677km of roads including Bharatmala (Rs5.4 trln). L&T has reported strong 42% growth in order inflow during H1 FY19 at Rs780 bn; while the management has maintained its FY19 order inflow guidance at 10%-12% implying inflow to decline by ~10% in H2 FY19 due to general elections. We expect order inflow to grow at a CAGR of 12% during FY18-21. With India expected to invest significantly in infrastructure creation over the next few years, the company like L&T is in a sweet spot.

Exhibit 10: Order Prospects for FY19 Exhibit 11: Order prospects (%)


We expect thrust on infrastructure spending to continue, going forward with sustained focus on rail, road and renewables. The Ministry of Railways has already indicated that it is looking at spending >Rs1.5trln in FY19. While investment in new thermal power plants is expected to remain subdued, investment in renewables is expected to rise, as the government plans to add 160GW of green power. Another major spending is expected in defence sector, as the government drives indigenisation of domestic defence industry. Thus, we expect government/public sector to continue to drive capex in the near term.

Exhibit 12: Order inflow growth of 7% in FY18 vs flat guidance Exhibit 13: Revenue growth lower than guidance in last 3 years


Particulars Rs bn

Infrastructure 2,000

Power T&D 950

MMH 15

Hydrocarbon 800

Heavy Eng & Defence 100

Total 3,865

Infrastructure52 Power T&D

25

MMH0.4

Hydrocarbon21

Heavy Eng & Defence

3

30 30 30 25

5

18 18 20

-

15

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40

28

41

14

(12)

25

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22

(13)

11 7

(20)

(10)

-

10

20

30

40

50

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Guidance Actual

(%)

32.530.0

17.520.0

25.0

17.515.0 15.0 15.0 15.0

10.0

45.047.0

14.0

19.021.0

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30

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50

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Guidance Actual

(%)



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CMP* (Rs) 1,422




With India expected to invest significantly in infrastructure creation over the next few years and Governments’ thrust on domestic manufacturing through its ‘Make in India’, the companies with focus on domestic market are in a sweet spot compared to the export-centric companies especially when the global economy is not in best of shapes. Also, emphasis on domestic manufacturing is likely to help the government to achieve its target of creating 100mn new jobs and increase the share of manufacturing in GDP by 2022, as the country aims to move from lower middle income to upper middle income nation.

Exhibit 14: Order Inflow Witness 14% CAGR over FY08-18 Exhibit 15: Current Order Backlog at Rs2,812bn (2.3x FY18 Rev.)


Order inflows grew by 7% YoY to Rs1,529bn in FY18 led by 15% YoY growth in domestic order inflow, while international order inflow declined by 13% YoY. Order inflow from domestic, Middle East, US/Europe and RoW contributed 77%, 11%, 7% and 6% to L&T’s order book. Looking ahead, we expect order inflow to clock ~12% CAGR over FY18-21E.

Good monsoon and implementation of Seventh Pay Commission were expected to spur the demand in both rural and urban markets. The outlook and opportunity are set to improve for the capital goods companies in near to medium-term. We have seen green shoots in short cycle orders even as long cycle is likely to see some delay.

Exhibit 16: Historically, order inflow growth has decline near the election

Source: Comapny, RSec Research

33.4

42.6

29.9

11.9

5.4

18.2

28.2

7.4 4.6

0.7

11.8 12.4 12.0

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2,000,000

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3,000,000

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4,500,000

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FY11

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FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Order Backlog Growth (%, RHS)

(Rs mn)

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34.8

14.7

(11.5)

24.7

44.5

22.2

(11.9)

4.5 6.9

11.0 12.4 12.5

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-10

0

10

20

30

40

50

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500,000

1,000,000

1,500,000

2,000,000

2,500,000

FY09 FY10 FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

E

FY20

E

FY21

E

Order Inflows (Rs mn) Growth (%, RHS)

-50

0

50

100

150

200

Sep-

03

Dec

/03

Mar

-04

Jun/

04

Dec

/07

Mar

/08

Jun/

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Sep/

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Dec

-12

Mar

/13

Jun/

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Sep/

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Jun/

18

Sep/

18

Dec

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Mar

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Order Inflow Growth (%) E&C Order infow growth (%)

Election in Feb-09

Election in May 14Election in May 19

Election in May-04



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CMP* (Rs) 1,422




On Track to Achieve Strategic Objective In line with its Five Year Strategy (FY16-21) – announced in Jun’16 – L&T looks forward to achieve 15% CAGR in revenue, 100bps expansion in margin (ex-Service), while reducing its net working capital to 18% of sales from 24% in FY16. Though L&T is likely to miss its revenue guidance due to slowdown witnessed during FY16-18. According to recent management guidence, NWC to be in the range of 20-21% of sales .

Exhibit 17: L&T bagged most of the Large orders placed in H1 FY19

Order Sector From Consortium Order Value Comments

(Rs bn)

Krishna Godavari basin

Hydrocarbon ONGC L&T - Baker Hughes - McDermott consortium

120 Supply of subsea production systems and installation of subsea umbilical

Bangalore Airport Airports Banglore International Airport

L&T 30 To construct Terminal-2 at Bangalore Airport to increase airport capacity by 25mn passengers PA

Coastal road Roads/Highways

Municipal Corporation of Greater Mumbai

L&T, HCC 96 L&T won package 1 & 4, HCC won package 2

Hyderabad Airport Airports GMR L&T 30 Expansion of the Terminal Building and Airside Infrastructure Works to increase capacity from 12m to 34 m passengers pa

Mumbai Nagpur Expressway

Others Roads MSRDC Various 230 12 companies were awarded 13 out of 16 packages to construct 700km long expressway

Purvanchal Expressway

Others Roads U P Expressways Industrial Devp. Authority

Various 112 5 companies were awarded the contract to construct 340km long expressway (8 packages)

Redevelopment of BDD Chawl

B&F MHADA (Maharshtra) Consortium between Capacite - Tata Projects and CITIC

117 Redevelopment of 122 BDD chawls in Worli.

Micro Lift Irrigation Scheme

Water Narmada Valley Devp. Authority

L&T 57 2 turnkey orders for the execution of micro lift irrigation

Residential towers under PMAY

B&F AP Township & Infra Devp. Corp. Ltd.

L&T 30 1,125 Nos of Residential towers of G+3 floors

Two fertilizer plants Hydrocarbon Hindustan Urvarak & Rasayan Ltd.

Consortium between L&T- Technip FMC

38 Setting up two fertilizer plants of 2,200 TPD Ammonia & 3,850 TPD Urea at Barauni and Sindri.

Bandra Versova Link Road

Roads/Highways

Municipal Corporation of Greater Mumbai

Reliance Infra 70 Reliance Infra-Astaldi JV won the order to construct 17.17 km sea link

Source: NHAI, Industry

Exhibit 18: Five Year Strategy

FY16 Target FY17-21 FY17 FY18 FY19E FY20E FY21E

Revenue growth (%) 10.0 15.0 7.8 9.0 15.8 11.3 13.4

EBITDA margin 11.5 12.0 10.1 11.3 11.7 11.5 11.8

Net working capital 24.0 18.0 19.0 21.7 21.2 21.4 21.4

Source: Company, Rsec research



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CMP* (Rs) 1,422




Exhibit 19: Divestment

Date Divestment Value (Rs bn) Valuation

Aug-11 IPO L&T Finance 12.5 2.5x PB

Aug-12 Sale of plastic division to Toshiba NA NA

May-14 Sale of Dharma port to Adani 27.5 NA

June-14 & Dec-15 Investment of Canadian Pension Fund 20 NA

Oct-15 Sale of Elante mall to carnival group 17.9 Rs12000/skft

Nov-15 Sale of Kattupalli port to Adani 20 NA

Apr-16 Sale of L&T seawood to Blackstone 15 NA

Jul-16 IPO of L&T Infotech 12.4 12.5 PE

Sep-16 Sale of L&T general insurance to HDFC Ergo 5.5 4x PB

Oct-17 Sale of EWAC alloys to Esab Holding 5.2 NA

Apr-18 Sale of Electrical & automation business to Schneider Electric

140 17x EV/EBITDA

Potential divestment

Nabha Power L&T is in discussion with Adani to sell Nabha Power at Rs30 bn, L&T has investment ~Rs30 bn in Nabha power

L&T valves L&T is looking to sale valves business

Road Assets monetisation L&T has applied for InvIT registration

L&T Hydrabad Metro L&T may sell stake in Hyderabad Metro in near future. Total investment of L&T is at ~Rs31 bn


Revenue Growth to Miss: During FY16-18, L&T’s revenue clocked 8.5% CAGR, lower than its guidance of 15% CAGR. We expect its revenue to witness ~13% CAGR over FY18-21E on the back of improved execution.

EBITDA Margin to Improve to a Sustainable Level of 12%: We expect margin to improve to 12.0% by FY21 led by gradual turnaround in hydrocarbon and shipbuilding business.

Working Capital to Reduce from 24%: NWC to sales declined to 24% in FY16 from 30% in FY14, which led to improvement in operating cash flows in core business. According to recent management guidence, NWC to be in the range of 20-21% of sales .

Divestment of Non-core Assets

In May’18, L&T announced sale of its E&A business to Schneider Electric for an all-cash consideration of Rs140bn. During last few years, the Company has monetised its investments in several asset-heavy businesses and JVs. It sold loss-making (loss of Rs1 bn) general insurance business, sold stakes in IT and tech services by IPO. Further, the Company is in advanced stage to sell its Kattupalli port (loss of Rs2bn). Some of the notable transactions have been its stake sale of Dhamra port to Adani Port. The Company plans to divest Nabha Power and plans to monetise its operational road projects through a Trust structure.



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CMP* (Rs) 1,422




Exhibit 20: Infrastructure Investment in India Exhibit 21: Trend in Infrastructure Investment in India

Source: Planning Commission , RSec Research Source: Company data, RSec Research

3.9 4.4 4.2

1.1

2.63.9

9,160

23,860

55,700

0

2

4

6

8

10

0

10,000

20,000

30,000

40,000

50,000

60,000

X Plan XI Plan XII Plan

Public (% of GDP, RHS) Private (% of GDP, RHS) Infrastructure Investment

Infrastructure is the key driver for the Indian economy and enjoys intense focus of the government for initiating policies to create of world-class infrastructure. Infrastructure sector includes power, bridges, dams, roads and urban infrastructure development.

Key investments in Infrastructure in last 2 year

f The Asian Infrastructure Investment Bank (AIIB) has announced US$200mn investment into National Investment & Infrastructure Fund (NIIF) in Jun’18.

f PE and VC investments in infrastructure sector reached US$3.3bn with 25 deals during Jan-May’18.

f Indian infrastructure sector witnessed 91 M&A deals worth US$ 5.4bn in 2017.

f In Feb’18, the GoI signed a loan agreement worth US$345mn with New Development Bank (NDB) for Rajasthan water sector.

f In Jan’18, National Investment & Infrastructure Fund (NIIF) partnered with UAE-based DP World to create a platform to mobilise investments worth US$3bn into ports, terminals, transportation, and logistics businesses in India.

Sector (Rs Tn) X Plan XI Plan XII Plan

Electricity (incl. NCE) 3.4 8.2 13.2

Roads & bridges 1.3 4.5 8.0

Telecom 1.0 3.9 4.4

Railways (incl. MRTS) 1.0 2.4 4.9

Irrigation 1.1 2.4 4.0

Water supply & sanitation 0.6 1.2 1.9

Ports 0.2 0.4 0.7

Airports 0.1 0.4 0.3

Increased Investment in InfrastructureThe capex in the economy continues to be driven by public sector mainly in the areas of Power (Renewables and T&D), Transportation (Roads, Railways and metro projects) and Defence (mainly towards indigenisation). With India expected to invest significantly in infrastructure creation over the next few years and Governments’ thrust on domestic manufacturing through its ‘Make in India’ project, the companies with focus on domestic market are in a sweet spot compared to the export-centric companies.



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Bharat Mala SchemeThe GoI has envisioned up-gradation of roads along India’s borders, coastal areas, ports, backward areas, religious places and tourist places as well as >100 district headquarters under Bharat Mala scheme. The Bharatmala scheme has been envisaged across different states vis-à-vis Gujarat, Rajasthan, Punjab, Jammu & Kashmir, Himachal, Uttarakhand, Uttar Pradesh, Bihar, West Bengal, Sikkim, Assam, Arunachal Pradesh, Manipur, Mizoram, Odisha, Tamil Nadu and Puducherry. It is an umbrella scheme comprising various other schemes, projects and programs. It is the biggest ever road and highways development programme undertaken by the GoI. The investment will target constructing 83,677 km of roads in next 5 years. These road building projects include BM project of ~34,000km with an investment of Rs53bn.

The BM scheme has 2 components

f Strategic Component: To build reliable road network across international border.

f Economic Component: To provide accessibility to border areas and improve trade in border region.

Exhibit 22: Competitive Analysis of India’s Road Network Exhibit 23: Budgetary Allocation for Roads

Source: International Road Federation, World Road Statistics, RSec Research Source: Company data, RSec Research

Km KM/

100,000

Population

Land

KM/$1bn

GDPCountry HighwaysSecondary

RoadsOthers

Total

Roads

Brazil 93,071 276,776 1,382,021 1,751,868 899 839

China 124,697 300,686 3,435,620 3,861,003 288 651

India 66,754 1,017,763 3,025,275 4,109,792 336 2,379

Japan 62,432 129,377 1,016,058 1,207,867 948 221

UK 52,706 122,543 244,416 419,665 674 185

USA 95,500 1,930,104 4,520,235 6,545,839 2,116 449

289317

428

580607

705

0

150

300

450

600

750

FY14 FY15 FY16 FY17 FY18 FY19E

(Rs bn)

Road Sector India has one of the largest road networks in the world aggregating to ~5.5mn km of roads. Though National Highways (NHs) comprise of only 1.9% of total length of roads, they carry >40% of total traffic across the length and breadth of the country. Road transportation has gradually increased over the years with improvement in connectivity between cities, towns and villages. While the share of transport sector in India’s GDP has increased from 6% in FY2001 to 6.5% currently, contribution of road transport sector (as % of GDP) has increased from 3.9% to 4.8%. The GoI has focused on road sector alongside railways and ports, as a key vehicle for catalysing public investments.



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Exhibit 24: Capex of Indian Railways Exhibit 25: Key Investment Break-up in Indian Railways


243

460

654

1,000

1,170

1,357

1,485

0

200

400

600

800

1,000

1,200

1,400

1,600

Avg FY04-09 Avg FY09-14 FY15 FY16 FY17 FY18 FY19E

(Rs bn) Rs bn FY13 FY14 FY15 FY16 FY17

Construction of new lines 53 58 71 202 186

Gauge conversion 27 31 37 36 51

Line doubling 25 30 39 105 205

Yard remodelling 8 7 8 13 14

Rolling stock 184 175 165 194 260

Track renewals 54 50 54 44 50

Electrification projects 10 13 14 23 35

Other electrical works 2 1 1 1 7

Workshops 15 18 17 15 33

Passenger amenities 8 9 9 11 19

Others 118 149 240 357 311

Total investments 504 540 654 1,000 1,170

Objectives of Bharat Mala scheme f Development of State Roads & Connectivity of Non-major Ports: 7,000km of roads is

to be constructed under this project. The estimated cost of this component is Rs802bn.

f Backward Areas, Religious & Tourist Places Connectivity: To connect backward areas, religious and tourists places. This component is also aimed at building 7,000km of new roads with an estimated cost of Rs853bn.

f Setubharatam Pariyojana: It is another major component of bharatmala scheme. Setubharatam is aimed at elimination of Railway crossing in India by constructing 1,500 major bridges and 200 Railway over Bridges (RoBs) or Railway under Bridges (RuBs).

f District Headquarters Connectivity Scheme: Is the 4th component of the scheme, under which 9,000km of road will be constructed and declared as NHs. The object is to provide better connectivity between district headquarters. The cost of this construction is estimated at ~Rs600bn.

Investment in RailwayIn last 3 years, the GoI has commendable progress in initiating infrastructure development. The capex plan being followed during FY15-FY19 is to focus on improving freight carrying capacity via capacity augmentation to achieve network decongestion by enhancing outlay for doubling/ 3rd/4th line projects and through investment in logistics parks. This is in sharp contrast to the earlier focus on network expansion through new line addition, which was primarily directed towards passenger services.



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Exhibit 27: Investment in Metro Projects over Last 5 Years

Name of the Metro City Kilometer Project Cost (Rs bn)

Delhi Metro Phase 1 New Delhi 65 106



Bangalore Metro Phase 1 Bangalore 42 138

Chennai Metro Phase 1 Chennai 45 146

Kochi Metro Rail Project Cochin 26 52

Navi Mumbai Metro Navi Mumbai 23 42

Noida Metro Noida 30 51

Lucknow Metro Phase 1A Lucknow 23 69

Hyderabad Metro Hyderabad 67 141

Mumbai Metro Line 1 Mumbai 11 24

Mumbai Mono Rail Mumbai 19 25


Jaipur Metro Phase 1 Jaipur 12 31

Kolkatta East-West Metro Kolkatta 17 90

Total 680 1,575

Source: MOUD, Rsec Research

Exhibit 26: Proposed investment in Railway during FY15-19

Description Rs bn (%)

Network Decongestion (DFC, Electrification, Doubling of elect. & traffic) 1,993 23.3

Network Expansion (including electrification) 1,930 22.5

National Projects (North Eastern & Kashmir connectivity projects) 390 4.6

Safety (Track renewal, bridge works, ROB, RUB and Signalling & Telecom) 1,270 14.8

Information Technology/ Research 50 0.6

Rolling Stock (Locomotives, coaches, wagons – production & maintenance) 1,020 11.9

Passenger Amenities 125 1.5

High Speed Rail & Elevated corridor 650 7.6

Station redevelopment and logistic parks 1,000 11.7

Others 132 1.5

Total 8,560 100

Source: Ministry of Rail, Rsec Research



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Exhibit 29: Proposed Investment in Greenfield Airport

Location Estimated Cost (Rs mn)

Mopa, Goa 31,000

Navi Mumbai, Maharashtra 167,040

Shirdi, Maharashtra 3,205

Sindhudurg, Maharashtra 5,200

Bijapur, Karnataka 1,500

Gulbarga, Karnataka 138

Hassan, karnataka 5,920

Shimoga, Karnataka 389

Kannur, Kerala 18,920

Durgapur, West Bengal 6,700

Dabra, Madhya Pradesh 2,000

Pakyong, Sikkim 5,535

Karaikal, Puducherry 1,700

Kushinagar, Uttar Pradesh 4,480

Dholera, Gujarat 17,120

Dagadarthi Mandal, Andhra Pradesh 2,930

Bhogapuram, Andhra Pradesh 22,600

Oravakallu, Andhra Pradesh 2,000

Total 298,378

Source: MOUD, Rsec Research

Exhibit 28: Metro Projects Expected to Complete by FY22

Name of the Metro City Kilometer Project Cost (Rs bn)

Bangalore Metro Phase 2 Bangalore 72 264

Extension of Chennai Metro Phase 1 Chennai 9 38

Nagpur Metro Rail Project Nagpur 38 87

Ahmedabad Metro Rail Project Phase 1 Ahmedabad 36 108

Pune Metro Rail Project Phase 1 Pune 31 114

Mumbai Metro Line 2A Mumbai 19 64

Mumbai Metro Line 2B Mumbai 24 110



Thane Bhiwandi Kalyan Mono Rail Thane 24 32

Jaipur Metro Phase 2 Jaipur 23 66

Kanpur Metro Kanpur 25 132

Ludhiana Metro Ludhiana 29 66

Chandigarh Metro Chandigarh 38 136

Total 432 1,593

Source: MInistry of rail, Rsec Research



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Diversified Business & Operations L&T operates in various segments including Infrastructure, Power, Heavy Engineering, defence Engineering, Electrical & Automation (recently sold to Schneider Electric), Hydrocarbon, Shipbuilding, Material Handling, and Mining Equipment, IT and Financial Services. Deep understanding of market dynamics, resources, operational expertise and integration capabilities enable the Company to compete effectively across these sectors.

The business-mix involves large spectrum of complex EPC contracts in hydrocarbon, process, metals and cement sectors for development of infrastructure projects in sectors like ports, roads, metro rail and airports. L&T is the largest player in the manufacturing of power T&D equipment like switchgears, other industrial goods and machineries. It has a strong presence in the Middle East with multiple JVs and manufacturing facilities. The Company has scaled-up in capabilities and scale by winning large complex turnkey projects across sectors overseas despite intense international competition.

The capex in the economy continues to be driven by public sector mainly in the areas of 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. Continued emphasis on infrastructure spending with focus on rail, road and renewable is expected to benefit L&T in the medium-term, in our view.

I. Infrastructure Domestic: The Government of India’s thrust on roads, railways and urban infrastructure has helped L&T to improve its revenue momentum. The revival of private sector capex is the key to faster infrastructure development in India. Railways will be one of the biggest drivers of infrastructure capex over the medium term, in our view.

Global: On the global front, investments are expected to increase, going forward led by rise in oil prices. However, overall spending level is expected to remain below the historic highs of FY13. Construction players of the emerging economies have been steadily building up cash position and internal expertise over the last decade.

L&T Expertise: L&T has built several iconic buildings/structures in India including airports, IT parks, malls, monuments, high-rises and health centers etc. It has maintained a healthy track record in successfully offering total solutions including DBC (Design-Build-Commission) expertise, advanced systems like Building Information Modules, a global supply chain and unrivaled project management expertise.

Exhibit 30: Key Completed Landmark Projects by L&T

Particulars Landmark Particulars Landmark

High rise towers 400 Nos Monorail corridor 19.5 Km

Airports 11 Nos Runways 7.49 mn sqft

IT parks 53 Nos Hydro power projects 8315 MW

Automobile plants 17 Nos Nuclear power projects 8080 MW

Cement plants 28 Nos E-BoP 29380 MW

Hospitals 45 Nos 400 MW of solar plants 400 MW

Substations 585 Nos 3260 tkm of railway track laying 3260 TKM

Highways 13500 km Railway electrification 12510 TKM

Water & waste water networks 40,000 KM Transmission lines 20600 CKM

Metro rail corridors 231 Km Water & waste water treatment plants 3400 MLD

Source: Company data, Rsec Research



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a) Buildings & Factories (B&F): L&T is market leader in B&F segment comprising of EPC of airports, hospitals, stadiums, hotels, institutional spaces, IT parks, office buildings, elite residential buildings, high-rises, and mass housing. It offers turnkey solutions from concept to commissioning across various businesses. The Company has dedicated engineering design centers, competency cells, advanced formwork systems, mechanised project execution, wide network of consultants and vendors, digitalised project control and a talented manpower. The Government of India has undertaken several initiatives to boost infrastructure, which is the key growth driver for B&F segment of L&T.

b)Transportation Infrastructure: L&T’s transportation infrastructure segment offers diversified product range in India and GCC countries. The business offers services for Roads, Runways & Elevated Corridors, Railways Construction, Railways Systems and International Infrastructure. It has vast experience in Project Management, Engineering Design & Construction Management to achieve operational efficiency. It has Engineering Design Centers in Mumbai, Faridabad and Chennai and an Offshore Engineering Centre in Mumbai.

c) Heavy Civil Infrastructure: L&T undertakes design, engineering and construction of projects in Metros, Nuclear plants, Hydel projects, Ports, Special Bridges, Tunnels and Defence. The business has strong presence in India, Middle East, Bhutan and Bangladesh. In-house design strength and unique construction methodology cells provide competent concept to-commissioning solutions.

d) Water Treatment: L&T Construction’s Water & Effluent Treatment business segment has maintained its engineering capabilities across all streams in India, Sri Lanka, Middle East and Africa. In-house engineering capabilities coupled with impeccable project management skills aided L&T to become the leading player in this segment. It has built >2,600 MLD of water treatment plants, laid 31,000+ km of water and wastewater pipeline and laid pipeline networks to bring >1lakh hectare of land into cultivation.

e) Power T&D: L&T has maintained a healthy track record in turnkey solutions for coal and gas-based power plants in India and overseas. It provides entire range of supercritical power equipment and services on EPC basis. L&T offers solutions and end-to-end services ranging from designing, manufacturing, supplying and installation/commissioning of Transmission lines, substations, underground cable networks, distribution networks, infrastructure electrification, solar PV plants, battery energy storage system and mini/micro grid projects. Apart from maintaining its dominant positioning in domestic market, L&T also enjoys significant share in the Middle East, Africa and ASEAN markets.

f EHVS & Power Distribution: EHVS (Extra High Voltage Substation Systems) & power distribution business of L&T provides turnkey solutions for extra high voltage air-insulated/gas-insulated substations for the utilities and power plants, EHV cable/communication backbone networks, utility power distribution and power quality improvement works, complete electrical and instrumentation solutions for various infrastructure projects i.e. airports and metros etc.

f Transmission Line: It offers turnkey EPC solutions in overhead lines for power evacuation and transmission, bolstered by its state-of-the-art tower manufacturing units at Puducherry, Pithampur and Kanchipuram.

f Solar: It provides single point EPC turnkey solution for solar PV related projects along with energy storage solutions.

f International Business: It has presence in the Middle East, Africa and ASEAN. It offers complete solutions for Power T&D including high voltage substations, power transmission lines, extra high voltage cabling and electrical, instrumentation and controls (EI&C) works for infrastructure projects i.e. airports, oil & gas industries etc. in the UAE, Qatar, Kuwait, Oman, Saudi Arabia, Bahrain, Algeria, Kenya, Ethiopia, Malawi, Botswana, Malaysia and Thailand.



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f) Smart World & Communication f L&T offers a wide spectrum of sustainable and scalable systems in security solutions for

city surveillance and homeland security systems, intelligent traffic management systems, critical infrastructure across ports, airports, metros, IT parks and public buildings.

f L&T has worked for Sabarmati Jail surveillance project and developed surveillance and intelligent traffic management systems in Ahmedabad, Gandhinagar and Vadodara.

• L&T has commissioned India’s largest city surveillance project and installed ~5,000 cameras at >1,500 locations in Mumbai.

• Executing the largest city surveillance and traffic management network in Hyderabad.

• Executed city wide Wi-Fi project in Mumbai.

• In security solution segment, L&T has secured prestigious project for creating command control centres for 3 cities in Rajasthan i.e. Bharatpur, Bikaner & Jodhpur.

II. Power L&T is one of the leading player EPC players, which offers design to commission integrated solutions for coal and gas-fired power projects on turnkey basis. It has proven track record in proving complete solution to thermal power segment. It has a pan-India presence with multiple project sites, project management centres and manufacturing facilities. The business has a state-of-the-art facility at Hazira in Gujarat, where it manufactures ultra-supercritical/supercritical boilers, turbines, generators, pulverisers, axial fans, air-pre-heaters and electrostatic precipitators. It also has design and project management centres at Vadodara, Faridabad and Chennai that ensure international standards of project management, quality, safety and on-time delivery.

Growth Drivers:The Power sector saw sustained momentum across the value chain like lower power deficits, reforms in distribution, capacity addition and grid augmentation.

f In the next 5 years, India is likely to add 40 to 50GW of ultra-supercritical/supercritical ordering in coal-based projects. During last 2 years, the Company has bagged order for ~2GW of boiler island from Neyveli Uttar Pradesh Power through competitive bidding, while the main plant orders of 4.6GW materialised in FY17.

f The Company has successfully executed export orders worth >US$200mnthrough JVs. Tenders for Flue-gas Desulphurisation (FGD) and Selective Catalytic Reduction (SCR) business started.

f The power sector is expected to unfold many positive trends in the areas of generation, transmission and distribution. The impact of UDAY scheme and 100% rural electrification, etc. provide visibility in the near term.

f The power sector expects a major thrust from the Government to boost the sector with equal focus on thermal, nuclear and renewables like solar, hydro, etc. Though emergence of alternative sources in the form of renewables is another challenge for the business, it is believed that coal will continue to be the mainstay of the domestic power sector for providing reliable and robust base load.

f The potential of FGD systems to meet the environmental norms has opened new opportunities.

f Excess capacity and aggressive pricing will continue to haunt the EPC players and it would reflect in their pricing and financials. The gas-based power plants are not expected to revive in India in near future. However, South East Asia continues to offer good opportunities for gas-based plants. The target countries for gas-based projects are Bangladesh, Sri Lanka, UAE and Indonesia.



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III. Heavy EngineeringThe Heavy Engineering business designs and fabricates engineered critical equipment and systems for several sectors i.e. fertiliser, refinery, petrochemical, chemical, oil & gas, thermal/nuclear power, aerospace and defence applications. L&T has a track record of executing large-size and complex projects with in-house engineering, fabrication facilities and R&D centres. The segment is structured into two groups.

Process Plant Equipment & Nuclear (PP&N): It manufactures large complex equipment i.e. hydro-processing reactors and high pressure heat exchangers for process plants and equipment for nuclear power sector. It has manufacturing facilities in Mumbai, Hazira, Vadodara and Sohar in Oman.

Defence & Aerospace (D&A): L&T is engaged in design-to-delivery of solutions across defence segments. During past three decades, L&T has focussed on building indigenous products and technologies with Defence Research & Development Organisation (DRDO). It has developed and produced naval platforms, artillery systems, air-defence systems, land and naval weapon systems, fire-control systems, naval equipment and systems, engineering systems for land and marine forces, military bridging systems, communication systems, missile sub-systems and rocket motors for space-launch vehicles. It has multiple work centres across India for defence business including assembly and integration facility at Talegaon near Pune, missile sub-system manufacturing facility in Coimbatore and defence electronics facility in Bengaluru. Besides these dedicated facilities, specific work-centres are also set up for strategic programme (Hazira), advanced composites (Ranoli), for prototype development and testing (Powai), while a site in Vishakhapatnam is operated under GOCO model for a strategic programme.

Growth Drivers f The government’s initiatives like ‘Make in India’ and thrust for improving ‘Ease of doing

business’ have augured well for the power sector. A marked shift towards indigenous procurement is evident from the clearances granted (82% by share and greater than Rs3,200bn) by Defence Acquisition Council in past 3 years for Indian companies to participate as prime bidders. The overall policy framework is being modified to offer a level playing field for Indian private sector and the defence PSUs.

f The Government of India (GoI) is looking to increase defence exports to ~$2 bn . Defence exports are a part of India’s foreign diplomacy initiative, particularly in South East Asian region. The GoI may grant military aid/export credit financing to promote such exports. It has received recommendations from a series of Committees with respect to selection/short listing of private sector entities as strategic partners.

f The process plant sector looks optimistic with major investments in South East Asia, MENA and domestic market. Globally, investments are expected in 5-6 major refineries. Major opportunities include: Takreer in Abu Dhabi, BAPCO in Bahrain, DUQM (Oman), KNPC (Kuwait), Pertamina (Indonesia), Thai Oil (Thailand), CPC (Taiwan) and Dung Quat (Vietnam).

f Investments are also seen in domestic sector by IOCL, HPCL, HMEL, and BPCL for capacity enhancement and BS-VI up-gradation to comply with applicable fuel emission standards.

f In thermal power sector, potential exists in domestic projects at Ghatampur, Obra and Jawaharpur (Uttar Pradesh). Globally, some major opportunities are expected from upcoming combined cycle power plants and supercritical plants especially in South East Asia and Middle East regions.

f In nuclear sector, the GoI has approved annual budget allocation of Rs30bn for expansion of indigenous programmes i.e. Kudankulam (V & VI) and PHWR projects.



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f For D&A SBG, defence procurement is expected to gain traction and programmes worth ~Rs2,000bn for Indian industry are expected to get converted into orders over coming 2 years. The preference for indigenously designed and developed products will create fresh opportunities in newer domains

f Over the medium-term, significant opportunities are envisaged in programmes for building new naval (surface as well as underwater) platforms, refit of conventional submarines, artillery and air defence guns, close-in weapons systems, military bridging systems, missile programmes (repeat orders) and sub-systems for space launch vehicles.

IV. Electrical & AutomationThe Electrical & Automation (E&A) business’ offerings include low and medium voltage switchgear components, electrical systems, marine switchgear systems, industrial and building automation solutions, surveillance systems, energy meters and protection relays. It has 5 decades of experience in in-house designing and development facilitates to introduce contemporary products and high precision tool manufacturing facility. E&A runs 6 switchgear training centres across India.

The constituents of E&A business are 2 Business Groups and designated subsidiaries. The products SBG includes Electrical Standard Products (ESP) and Metering & Protection System (MPS) business units, while projects SBG comprises of Electrical Systems & Equipment (ESE) and Control & Automation (C&A) business units, respectively.

V. HydrocarbonThe hydrocarbon business provides integrated ‘design-to-build’ turnkey solutions for global oil and gas Industry including extraction and processing, petroleum refining, chemicals and petrochemicals, fertiliser sectors and cross country pipelines and terminals. In-house capabilities enable the Company to deliver complete end-to-end solutions through detailed engineering, procurement, fabrication, project management, construction, installation and commissioning.

This business has a fully-integrated capability chain including in-house engineering and R&D centres, world-class modular fabrication facilities as well as onshore construction and offshore installation capabilities. This business has repeatedly delivered, large, critical and complex projects, globally by virtue of its customer focus, responsiveness, highly skilled man power, world-class quality, Health, Safety & Environmental (HSE) practices and culture of excellence.

L&T’s major facilities in India include Engineering & Project Management Centres at Mumbai, Vadodara, Chennai and Bengaluru and Fabrication Yards at Hazira and Kattupalli (near Chennai). Its overseas presence is primarily in the Middle East (Sharjah), Saudi Arabia (Al-Khobar), Kuwait and Oman (Muscat). The business also has a major modular fabrication facility at Sohar (Oman) held through a subsidiary.

This business caters to clients across the hydrocarbon value chain through the following verticals

f Hydrocarbon Offshore

f Hydrocarbon Onshore

f Hydrocarbon Construction Services

f Hydrocarbon Modular Fabrication Services

f Hydrocarbon Engineering Services



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Growth Drivers f The Oil & Gas industry is showing some signs of revival with the oil prices have seen

uptrend. In domestic offshore sector, launch of Open Acreage Licensing Policy is expected to attract investment in E&P sector. ONGC in particular, is progressing on its US$5bn, 4--year investment plan for development of deepwater field KG/98-2 off the east coast of India. This will provide significant opportunities to the offshore and fabrication verticals over the medium-term given its strategic location at Kattupalli yard on east coast and recent tie-up with McDermott and GE to develop cost-effective sub-sea solutions.

f A number of Brownfield and decommissioning projects are also expected to come up in near future. The Indian PSU refineries are embarking on upgrades to comply with BS-VI emission norms and are mulling to set up gas processing facilities for Saudi Aramco ) though the mode of execution is expected to evolve in due course.

f The roll-out of comprehensive Urea Policy by the GoI is expected to revive PSU urea plants at Gorakhpur, Sindri and Barauni. Energy efficiency improvement projects are being actively pursued in existing fertiliser units. The GoI is also focusing on setting up LNG infrastructure, while investments in LNG receiving plants – both land-based terminals and Floating Storage Regasification Unit (FSRU) – are on the anvil.

f In the Middle East, Saudi Arabia is launching ambitious Oil-to-Chemical projects with an investment of over US$30bn till 2030 and the Kingdom will be a key market for both onshore and offshore verticals.

VI. L&T IDPLL&T IDPL is a major player in PPP projects in India for Roads & Bridges, Ports, Wind Energy and emerging sectors i.e. power transmission lines. Currently, it has a portfolio of 17 projects of with a cost of ~Rs175bn, which includes 15 road projects (7,182 km) 1 transmission line project and a port berth at Haldia. L&T IDPL’s portfolio of infrastructure assets also includes windmills in Tamil Nadu.

L&T IDPL is one of India’s largest infrastructure developers with a proven track record across sectors. For Road, IDPL is one of the largest developers in India in terms of lane kilometres under signed concession agreements.

Exhibit 31: Overview of IDPL’s Road ProjectOperational road projects State No. of lanes Length of highway (Km) Operational toll plazas

Chennai - Tada Tamil Nadu 6 43 1

Krishnagiri - Walajahpet Tamil Nadu 6 148 2

Krishnagiri - Thopur Tamil Nadu 4 86 1

Coimbatore By - pass Tamil Nadu 2 28 7

Devihalli - Hassan Karnataka 4 77 2

Jadcherla - Kothakoa Andhra Pradesh 4 180 1

Ahmedabad - Viramgam - Maliya Gujarat 4 173 4

Halol - Godhra - Shamlaji Gujarat 4 132 4

Rajkot - Jamnagar - Vadinar Gujarat 4 83 3

Vadodara - Bharuch Gujarat 6 56 1

Samakhiali - Gandhidham Gujarat 6 60 1

Palanpur - Swaroopganj Guj/ Rajasthan border 4 76 2

Pimpalgaon - Nashik - Gonde Maharashtra 6 60 1

Panipat Elevated Corridor Haryana 6 10 1

Beawar - Pali - Pindwara Rajasthan 4 244 4




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The portfolio of road projects includes some of the most economically significant and high-traffic corridors connecting key industrial cities and ports in India.

Completed Projects f Bangalore International Airport

f 335-meter, 2-laned Watrak bridge across the Watrak river (Gujarat)

f 6 km-long second Narmada Bridge at Zadeshwar on NH8 (Gujarat)

f 880-metre 6-laned 2nd Vivekananda Bridge across river Hooghly in Kolkata

f 51.6km 4-lane toll road from Ahmedabad to Mehsana (Gujarat)

f 90 km six-lane Jaipur-Kishangarh Expressway on NH-8 (Rajasthan).

Hyderabad MetroHyderabad metro rail project implemented by an SPV namely L&T Metro Rail (Hyderabad) Ltd. on a Design-Build Finance-Operate-Transfer (DBFOT) basis vide a concession agreement signed with the Government of Telangana. The concession period is 35 years with an entitlement to renew for a further period of 25 years. The Hyderabad metro rail network will cover a total distance of ~72 km across 3 corridors. The project will include ~18.5mn sqr.ft of Transit-Oriented Development (TOD) in the earmarked parking and circulation areas and depots.

L&T Power Development group f The power development group invests, develops, operates and maintains the power

generation projects both thermal and hydel.

f Hydel Power Projects: Hydel projects with an aggregate capacity of 870 MW are in various stages of development.



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Outlook & ValuationWe are positive on L&T led by strong execution in core E&C business with robust order inflow momentum led by strong performance of key segments i.e. Infrastructure and Hydrocarbon. L&T is best placed to cash in enormous opportunities in domestic infrastructure space, as it fulfills the basic requirements i.e. balance-sheet size, past track record, technical expertise and adequate liquidity. We expect its revenue and earnings to clock 13% and 15% CAGR, respectively over FY18-21E. At CMP, the stock trades at 19.9xFY20E and 17.1xFY21E earnings. We initiate coverage on the stock with BUY recommendation and an SOTP-based Target Price of Rs1,760.

We value L&T using Sum of the Parts method. We value standalone and hydrocarbon business at 20x earnings, listed infotech and financial holding at Mcap, IDPL at book value and super critical JV at DCF.

Key Risks f Delay in finalization of orders in the domestic market and international market

f Slowdown in order execution.

Background & BusinessLarsen & Toubro (L&T) is the largest engineering and construction company in India with a wide range of services including IT, Finance and Electrical business. We believe L&T is well-placed to benefit from the several big-ticket projects, as it satisfies all basic requirements i.e. balance-sheet size, strong track record, technical expertise and adequate liquidity.

Exhibit 32: SOTP-based Target Price of Rs1,760

SOTP (Rs) L&T’s Stake (%)

HoldCo Discount (%)

Methodology Mutiple L&T’s Value (Rs bn)

Value (Rs)

Value (%)

L&T Standalone 100.0 P/E x FY21 20 80 1,188 68

Hydrocarbon 100.0 P/E x FY21 20 7 98 6

L&T Infotech 75.0 20 MCap 1.0 198 148 8

L&T Technology 80.7 20 MCap 1.0 115 86 5

L&T Finance Holding 64.0 20 MCap 1.0 142 106 6

L&T IDPL 97.0 1x P/BV 1.0 104 78 4

Supercritical JV 51.0 DCF 35 26 1

Others 41 30 2

Price Target 1,760 100


Exhibit 33: 1-Year Forward PE Band Exhibit 34: Trading at Mean PE

Source: Company, RSec Research Source: Company, RSec Research

-

500

1,000

1,500

2,000

2,500

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

Oct

-16

Apr

-17

Oct

-17

Apr

-18

Oct

-18

Price 15x 20x 25x 30x 30x

5

10

15

20

25

30

35

40

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Oct

-14

Apr

-15

Oct

-15

Apr

-16

Oct

-16

Apr

-17

Oct

-17

Apr

-18

Oct

-18

PE Mean 1+SD 1-SD



22

CMP* (Rs) 1,422




Profit and Loss Account

Y/E Mar (Rs mn) FY18 FY19E FY20E FY21E

Net Sales 1,198,621 1,387,435 1,543,720 1,749,890

Growth (%) 9.0 15.8 11.3 13.4

Total Expenditure 1,062,907 1,224,528 1,366,573 1,544,013

Cost of Materials 833,053 955,816 1,070,514 1,215,033

Employee costs 152,925 179,328 197,261 216,987

Others 76,929 89,384 98,798 111,993

EBITDA 135,714 162,907 177,148 205,877

Growth (%) 22.5 20.0 8.7 16.2

EBITDA Margin (%) 11.3 11.7 11.5 11.8

Depreciation 19,287 22,020 23,321 24,695

EBIT 116,427 140,887 153,827 181,182

Growth (%) 33.8 21.0 9.2 17.8

EBIT Margin (%) 9.7 10.2 10.0 10.4

Interest Exp 15,385 16,589 17,548 18,886

Other Income 14,120 13,795 14,899 16,091

Add: Excess Provision written back 1,230 - - -

PBT 116,392 138,093 151,177 178,387

Growth (%) 26.7 18.6 9.5 18.0

Tax 31,989 39,113 39,004 48,521

(% of PBT) 27.5 28.3 25.8 27.2

Profit of Associates (4,359) (4,131) (4,544) (4,998)

Minority Interest (6,346) (6,980) (7,678) (8,446)

Adjusted PAT 73,699 87,869 99,952 116,422

Net Margin (%) 6.1 6.3 6.5 6.7

Fully Diluted EPS (Rs) 52.6 62.7 71.3 83.1

Growth (%) 13.6 19.2 13.8 16.5



23

CMP* (Rs) 1,422




Balance Sheet


Share capital 2,803 2,803 2,803 2,803

Reserves & Surplus 553,767 614,934 684,496 765,500

Net worth 556,570 617,737 687,298 768,303

Total borrowings 1,075,241 1,140,564 1,227,566 1,306,112

Minority Interest 56,250 49,270 41,591 33,145

Deferred tax liabilities 6,379 6,379 6,379 6,379

Long Term Liabilities & Prov. 4,219 4,797 5,580 6,376

Total liabilities 1,698,659 1,818,747 1,968,415 2,120,315

Net Fixed assets 304,618 324,141 344,261 360,986

Loans & Advances for finance activity 618,165 679,982 747,980 822,778

Other non current assets 52,021 56,182 60,677 65,531

Long term loans & Advances 17,939 19,374 20,923 22,597

Goodwill 15,618 16,867 18,217 19,674

Investments 153,113 153,833 158,560 164,293

Current assets 1,267,740 1,355,057 1,523,646 1,637,836

Inventories 48,478 54,109 61,584 69,568

Debtors 346,541 418,897 489,283 508,943

Cash 80,325 69,044 76,710 70,350

Loans and advances 270,077 279,934 291,289 302,861

Other Current Assets 522,319 533,073 604,781 686,114

Current liabilities 721,802 775,077 891,615 955,613

Provisions 30,073 34,637 39,101 44,624

Net current assets 515,866 545,342 592,930 637,599

Deferred Tax Assets 21,320 23,025 24,867 26,857

Total Assets 1,698,659 1,818,747 1,968,415 2,120,315



24

CMP* (Rs) 1,422




Cash Flow Statement


Cash flow from operating activity

Cash from Operations (+)

Profit after tax 73,699 87,869 99,952 116,422

Add : Depreciation 19,287 22,020 23,321 24,695

Add: EOI - - - -

Add : Deferred Tax (3,689) (1,706) (1,842) (1,989)

Changes in Working Capital (43,520) (40,758) (39,922) (51,029)

Net Cash from Operations 45,777 67,425 81,509 88,098

Cash from Investing (-)

Capital Expenditure 38,142 41,542 43,441 41,420

Change Investments (44,417) 720 4,726 5,733

Change in others 163,204 67,413 74,043 81,326

Net Cash from Investing 156,928 109,675 122,210 128,479

Cash From Financing (+)

Issue of Equities 937 - - -

Other Changes in Reserves 53,468 61,167 69,561 81,005

Change in Debt 135,478 65,323 87,002 78,547

Dividend Paid (-) (22,384) (26,702) (30,390) (35,417)

Other financing items (31,748) (68,819) (77,806) (90,113)

Net Cash from Financing 135,752 30,969 48,367 34,021

Net Change in Cash 24,600 (11,281) 7,666 (6,360)

Opening Cash 55,725 80,325 69,044 76,710

Closing Cash 80,325 69,044 76,710 70,350



25

CMP* (Rs) 1,422




Key Ratio

Y/E Mar FY18 FY19E FY20E FY21E

Valuation Ratio (x)

P/E 27.0 22.7 19.9 17.1

P/CEPS 21.4 18.1 16.2 14.1

P/BV 3.6 3.2 2.9 2.6

Dividend yield (%) 1.4 1.6 1.8 2.1

EV/Sales 2.6 2.3 2.1 1.9

EV/EBITDA 23.1 19.8 18.6 16.5

Per Share Data (Rs)

EPS 52.6 62.7 71.3 83.1

Cash EPS 66.4 78.4 88.0 100.7

DPS 19.3 23.1 26.2 30.6

Book Value 397 441 490 548

Returns (%)

RoCE 7.7 8.5 8.6 9.3

RoE 13.2 13.8 14.5 15.2

Turnover ratios (x)

Asset Turnover (Gross Block) 0.4 0.4 0.4 0.3

Inventory / Sales (days) 14.8 14.2 14.6 14.5

Receivables (days) 105.5 110.2 115.7 106.2



26

CMP* (Rs) 1,422




Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India’s leading retail broking houses. Reliance Capital is amongst India’s leading and most valuable

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Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN No.29889.

Rating GuidesRating Expected absolute returns (%) over 12 months

BUY >10%

HOLD -5% to 10%

REDUCE >-5%

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