larsen & toubro (lartou) -...

May 26, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Performance uproots pessimism… • Standalone revenues grew 11% YoY to | 21061 crore (I-direct

estimate: | 20478 crore) and were above our estimates. Infrastructure segment revenues grew to | 15949 crore, up 12% YoY while power segment revenues grew 33% YoY to | 1900 crore. However, a subdued performance was witnessed in the metallurgy & heavy engineering segment (revenues down 2% to | 905 crore) and electrical & automation segment (revenues down 6% YoY to | 1236 crore). Consolidated revenues were at | 33157 crore, up 18% YoY

• Order inflows for the quarter were at | 43300 crore vs. | 47600 crore in Q4FY15. For full year, FY16 order inflow was at | 136900 crore, down 12%YoY. Total order backlog as of Q4FY16 was at | 250000 crore. The book to bill ratio as of FY16 was at 2.4x. Order inflows came in muted in FY16 due to loss of bids in the power sector and continued slowdown in the metals & heavy engineering segment. As of FY16, international orders constituted 28%

• Standalone EBITDA margins came in robust at 15.2%, up 210 bps YoY (I-direct estimate of 12.4%). EBITDA margins in the standalone business were the highest in the last 12 quarters mainly on account of robust profitability being witnessed in the infrastructure segment

Proxy play on India Infrastructure story L&T is the most diversified engineering & infrastructure developer in India with a presence across all segments of infrastructure i.e. power, roads, hydrocarbons & process industries. The company is also planning to scale up in niche areas like defence, nuclear power and shipbuilding, which have potential to add significantly to overall revenues in the next three to five years (for instance, opening of defence FDI and ordering can help L&T achieve scale of 5x in terms of defence segment revenues from current | 1000 crore run rate). Over the last couple of years, L&T has added capacity to meet increasing volumes. For instance, the company had added 5000 MW of power equipment facility, the heavy engineering facility in Oman (FY10) and recently added complex shipbuilding facility. Hence, we expect L&T to register revenue CAGR of ~11% in FY15-18E as it commands a strong order backlog of | 256458 crore, thereby providing visibility of over three years. Infrastructure hydrocarbon, defence orders to lead; power to revive As per the management, L&T is favourably placed in power generation orders to the tune of | 6000 crore. On the defence and nuclear side, it expects to bag order inflows in excess of | 17000 crore. On the hydrocarbon side, it is favourably placed in orders worth | 8000 crore, which may get placed in Q1FY17-Q2FY17. In the roads sector, L&T is expecting inflows to the tune of | 15000 crore. The management also sees strong prospect in the hydrocarbon segment in the Middle East. Strong outlook to re-rate stock; reiterate BUY with TP of | 1655 Strong performance across all variables, strong guidance for FY17E in terms of order inflows, revenue growth will lead to a re-rating of the stock. Management focus on reducing capital intensity by selling non-core subsidiaries (Nabha Power, general insurance & restructuring L&T IDPL) will ease cash flow pressure on parent’s B/S and impact RoEs positively (we factor in 60 bps improvement in RoEs to 14.4% by FY18E). On the financials front, we expect revenue, PAT to grow at a CAGR of 15.8%, 12.5% YoY, respectively in FY16-18E. We highlight that from a two to three year perspective, L&T remains the best play on capex cycle recovery in India and top large cap pick in capital goods sector.

Rating matrix Rating : BuyTarget : | 1655Target Period : 12 monthsPotential Upside : 17%

What’s Changed?

Target Changed from | 1475 to | 1655EPS FY17E Changed from | 56.3 to | 61.6EPS FY18E Changed from | 63.6 to |72Rating Unchanged

Quarterly Performance

Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%)

Revenue 21,061.3 18,967.9 11.0 14,773.9 42.6EBITDA 3,193.2 2,489.9 28.2 963.1 231.6

EBITDA (%) 15.2 13.1 203 bps 6.5 864 bpsPAT 2,539.1 1,874.9 35.4 752.4 237.5

Key Financials | Crore FY15 FY16 FY17E FY18ENet Sales 57,017.4 59,779.6 69,343.8 80,172.4 EBITDA 6,487.9 6,182.1 7,837.8 9,031.4 Net Profit 4,746.8 5,274.6 5,693.1 6,674.9 EPS (|) 51.3 57.0 61.6 72.2

Valuation summary

es

FY15 FY16 FY17E FY18EP/E 27.7 24.9 23.1 19.7 Target P/E 28.7 25.9 24.0 20.4 EV / EBITDA 21.2 21.5 17.4 15.1 P/BV 3.8 3.4 3.1 2.8 RoNW (%) 13.6 13.8 13.6 14.4 RoCE (%) 11.9 10.0 11.8 12.6

Stock data Particular AmountMarket Capitalization | 131335.8 CroreTotal Debt (FY16) | 11336.2 CroreCash and Investments (FY16) |5823 CroreEV | 110196.1 Crore52 week H/L |1893/ | 1069Equity capital | 185 CroreFace value | 2

Price performance (%)

1M 3M 6M 12MLarsen & Toubro Ltd 4.8 (4.9) 9.0 59.8

BHEL 1.5 3.8 17.0 66.0 Thermax Ltd 5.0 10.5 30.5 75.4 Crompton Greaves (14.7) (13.5) (16.0) 37.1

Larsen & Toubro (LARTOU) | 1420

Research Analyst

Chirag Shah [email protected]


Variance analysis Q4FY16 Q4FY16E Q4FY15YoY (Chg %) Q3FY16oQ (Chg %) Comments

Revenue 21,061.3 20,477.8 18,967.9 11.0 14,773.9 42.6 Revenues were ahead of estimates. Infrastructure segment and power segment revenues grew better than estimates while moderation of decline in HE and MMH segment also aided in beat

Other Income 736.7 655.3 570.1 29.2 617.1 19.4 Other income was ahead of expectations on account of better treasury income

Employee Expenses 1,037.2 1,146.8 1,019.2 1.8 1,199.7 -13.5

Raw Material Expenses 14,536.2 15,870.3 14,803.8 -1.8 11,819.1 -157.5Other Operating Expenses 617.8 921.5 654.9 -5.7 753.2 -18.0

EBITDA 3,193.2 2,539.2 2,489.9 28.2 963.1 231.6

EBITDA Margin (%) 15.2 12.4 13.1 203 bps 6.5 864 bps Margins were significantly higher than estimates on the back of robust execution, lower other expenditure

Depreciation 254.5 309.7 245.8 3.5 244.4 4.1

Interest 397.3 333.4 334.1 18.9 381.2 4.2 Higher working capital led to higher finance costs

PBT 3,278.0 2,551.4 2,480.1 32.2 954.6 243.4Total Tax 661.6 704.0 605.2 9.3 202.2 227.2PAT 2,539.1 1,847.3 1,874.9 35.4 752.4 237.5 PAT was ahead of estimates on account of higher-than-expected

execution and EBITDA margins

Key MetricsOrder inflows 33,418.0 48,100.0 41,835.0 -20.1 31,845.0 4.9 Order intake was lower due to weak macro conditionOrder backlog 235,000.0 273,000.0 218,740.0 7.4 243,600.0 -3.5 Backlog provides strong visibility for next two to three years

Source: Company, ICICIdirect.com Research Change in estimates

(| Crore) Old New % Change Old New % ChangeRevenue 68,651.0 69,343.8 1.0 78,216.0 80,172.4 2.5

EBITDA 7,713.0 7,837.8 1.6 8,778.0 9,031.4 2.9EBITDA Margin (%) 11.2 11.3 7 bps 11.2 11.3 4 bps

PAT 5,290.4 5,693.1 7.6 5,884.0 6,674.9 13.4EPS (|) 56.3 61.6 9.3 63.8 72.2 13.2

Operating leverage and higher execution will lead to margin expansion

Revision in revenues coupled with high other income and 26% effective tax rate will lead t

FY17E FY18EComments

We have revised upwards the execution rates in FY17E and FY18E

Source: Company, ICICIdirect.com Research Assumptions

CommentsFY15 FY16 FY17E FY18E FY17E FY18E

Order Inflow growth 33.8 -16.3 12.8 13.5 11.1 12.9 In term of order inflows infrastructure segment (both domestic and international) will dominate intake while hydrocarbon and defence are also expected to contribute significantly

Order Backlog growth 34.2 7.4 20.8 2.1 23.7 1.8Revenue growth 3.2 5.2 13.5 15.6 14.5 13.9 Execution will pick up in FY17E on a low baseEBITDA Margins 11.4 10.3 11.3 11.3 11.2 11.2

Current Earlier

Source: Company, ICICIdirect.com Research


Key results and analyst meet highlights

• Order inflows were at | 105400 crore for FY16 while for Q4FY16 the same was at | 33420 crore. The order backlog as of Q4FY16 was at | 235000 crore. The company has set out robust 15% YoY order inflow growth guidance for FY17E, albeit on a low base of FY16. On the segmental front, in FY16, infrastructure segment secured orders worth | 84817 crore whereas power segment, owing to stiff pricing competition lost out on many bids and reported order inflows of | 2702 crore. The MMH segment secured orders worth | 3661 crore registering a decline of 40% while heavy engineering segment witnessed a decline of 54% YoY. Restoration of the hydrocarbon segment is in sight as it was able to report flattish inflow of | 10447 crore in FY16

• EBITDA margins increased 210 bps YoY to 15.2% (I-direct estimate of 12.4%) mainly on account of strong execution in both domestic and international business, job mix in the infrastructure segment and lower EBIT losses in heavy engineering segment and turnaround in EBITDA of MMH division

• In terms of segmental performance, infrastructure segment revenues grew 20% YoY to | 18000 crore while the power segment also reported 20% YoY growth on back of execution of orders from Bangladesh (gas-based power plant). MMH and heavy engineering, on the back of lower order carry, faced 3% YoY decline in revenues. The hydrocarbon segment, on the positive side, reported 12% YoY growth in revenues.

• In terms of guidance, L&T has guided strong 12-15% YoY growth in revenues and 15% YoY growth in order inflows. The margins at the consolidated level are expected to improve 50 bps YoY in FY17E

• Net working capital for the consolidated business remained flattish QoQ at 24%. On a full year basis, it marginally improved from 25% in FY15 to 24% in FY16

• The management indicated that execution in the domestic infrastructure segment remains steady both in the international and domestic markets.

• The company expects to post | 150 crore of PAT in the hydrocarbon segment with a good pipeline in FY17. In the shipbuilding business, it is expected to post a decline in losses at | 100 crore

• As per the management, L&T is favourably placed in power generation orders to the tune of | 6000 crore. On the defence and nuclear side, it expects to bag order inflows in excess of | 17000 crore. On the hydrocarbon side, it is favourably placed in orders worth | 8000 crore, which may get placed in Q1FY17-Q2FY17. In the roads sector, L&T is expecting inflows to the tune of | 15000 crore

• The company indicated that its projects in Middle East like Riyadh Metro, Doha Metro, expressways, etc, are all on schedule. It does not face any slowdown concerns. Total 45% of the work on Riyadh Metro is complete while in Doha Metro they have completed critical task of civil work of tunnelling


Company Analysis Macro sensitivity does impact L&T’s prospects but intensity moderating

L&T’s order inflows have scaled up by ~8x in FY04-15, representing a robust CAGR of 23% over the same period. In absolute terms, L&T’s order inflows were at | 13,200 crore in FY04, which have eventually scaled up to | 126500 crore by FY15 (excluding hydrocarbon business). This outsized growth in order flows is attributable to a high quality management, superior and timely execution track record, capability to execute mega sized projects across segments, stringent risk management techniques, timely diversification across sectors/geographies and credible reputation among private sector clients. Revenue growth as percentage of GDP growth has averaged at 1.4x while order inflow growth as a percentage of GDP growth has averaged at 1.7x in FY05-14. Going ahead, even though capital formation is weak, we expect L&T to maintain a ratio of 1.2x and 1.5x with respect to revenues and order inflows vis-à-vis GDP growth. We expect L&T to report revenue CAGR of 15.8% in FY16-18E, on a high base.

Exhibit 1: How L&T stacks up vis-à-vis macros

-20-10

0102030405060

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

(%)

Nominal GDP growth L&T's Order inflow growth

L&T's Revenue Growth

Source: Company, ICICIdirect.com, Research

Exhibit 2: Trend in order inflows for L&T

941

1,259 1,2591,054

1,1891,350

0200400600800

1000120014001600

Inflo

wAc

hiev

ed

Inflo

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Man

agem

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Guid

ence

Our

Expe

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Our

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ctat

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Our

Expe

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FY14 FY15 FY16 FY17E FY18E

(| B

n)


Over the next three to five years, we expect L&T’s revenue growth to be propelled by the infrastructure division as over 75-80% of the backlog and 50% of new order wins are coming from these segments. We have also noted that L&T has been able to meet most its yearly guidance across order inflow growth, revenue growth and margins. Over FY05-15, L&T has been successful in seven to eight years in meeting its promises albeit the nature of economic cycles.

Exhibit 3: Trend in revenue growth

333.7 369.7438.5

531.9608.3 568.4 586.7 617.0

700.4809.8

0100200300400500600700800900

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

(| b

illion

)

-10

0

10

20

30

40

(%)

Revenue YoY Growth


Exhibit 4: How has L&T fared vis-à-vis its cycles across business cycles

Guidance Achievement Guidance AchievementFY05 20-25 12 20-25 39FY06 35-50 42 15-20 1FY07 20-30 37 20-25 16FY08 30 40 30-35 45FY09 30 28 30 47FY10 25-35 41 15-20 14FY11 25 14 20 19FY12 5 -12 25.00 21FY13 15-20 25 15-20 15FY14 15-20 15 15 10FY15 20 22 15 3FY16 0 -13 15 12FY17E 15 15

Inflow Growth (%) Revenue Growth (%)



Diversity: L&T’s biggest USP both during up/down turns in capex cycle

L&T’s current order backlog of | 235000 crore (Q4FY16, excluding hydrocarbon & services) is highly diversified across segments and geographies. Out of the current backlog, the infrastructure segment (roads, buildings & factories, urban infra, airports) comprises 75% of the backlog whereas power (generation & T&D) and process (metals & material handling) segment’s share is at 8% and 5%, respectively. Others (defence, shipbuilding and electronic products), on the other hand, constitute 7% of the backlog. However, with the focus of the government on reforming the power sector, opening of the defence sector and L&T’s vigorous efforts to scale up international hydrocarbon business (vision of $5 billion in revenues), share of these segments can rise sharply in the next five years. Exhibit 5: Break-up of backlog

39%36%

41%33%

36%43%

49%67%69%70%

78%70%

68%71%71%

75%75%

16%16%

22%30%

32%28%

28%10%

9%8%

10%9%

11%10%10%

8%8%

19%23%

14%15%

12%10%

8%6%6%6%

7%7%

7%6%

5%6%

12%14%

16%16%

16%15%

10%9%9%

7%6%

4%5%

5%5%5%4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FY07FY08FY09FY10FY11FY12FY13

Q1FY14Q2FY14Q3FY14

Q4FY14*Q1FY15Q2FY15Q3FY15Q4FY15Q3FY16Q4FY16

Infrastructure Power Hydrocarbons Process Others

Source: Company, ICICIdirect.com Research *: Does not include Hydrocarbon segment orders as the division was hived off into separate subsidiary.

Even in terms of geography, L&T has witnessed strong ordering momentum from the international markets. This was a management strategy set earlier in FY11-12 to diversify as the ordering outlook was muted in domestic markets. From a share of 9% in FY11, the share of international order has gone up to 25% in FY15 and over 30% in FY16. The management vision of ramping up this share to 25-30% till FY17E seems quite achievable, going ahead.

Margins to improve gradually from FY17E onwards

EBITDA margins have averaged 11.4% in FY08-16. EBITDA margin, primarily, is a function of the order book mix and commodity prices. The E&C segment (80-85% share in total EBITDA) and E&E segment (5-7% share in total EBITDA), carries a margin of nearly 11% while segments like M&IP and others carries heftier margins averaging 15-20%. However, going ahead, higher execution of international orders and infrastructure segment margins will see a structural shift. We believe that a decline in margins is getting played out currently as margins in FY15 and FY16 were at 11.4% and 10.3% (excluding hydrocarbon), respectively, and which were also hit by weak execution in the heavy engineering and MMH division owing to weak outlook of those segments. Going ahead, we expect margins to be back at 11.3% levels in FY17E and FY18E assuming domestic ordering picks up while the magnitude of order from international continues will exhibit steady state of execution mainly in the area of roads, water, power T&D and metro.


Exhibit 6: Trend in EBITDA margins

9.9

11.4 11.5

12.8 12.811.7

10.5

11.8 11.4

10.311.3 11.3

5

7

9

11

13

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

(%)


From FY14 onwards, L&T has started reporting segmental margins and to the Street’s surprise, infrastructure segments margins have ranged at 11-13% while the main disappointment came in from the hydrocarbon segment, which ranges at 7-8% as execution has been lumpy while lower orders and high operating leverage (commissioning of new BTG facility) has led to low single digit margins in the power segment. Exhibit 7: Trend in segmental EBITDA margins

Q4FY16 Q4FY15 FY16 FY15Infrastructure 16.4 13.6 11.7 11.1Power 11.5 13.3 11.6 16Heavy Engineering 2.5 13.2 -0.7 12.3MMH 13.6 11 5.5 10.5Hydrocarbon -1.7 -6.9 2.2 -15.4E&A 18.5 18.4 13.9 14.8Others 17.5 22.2 20.7 22.9


PAT CAGR of 12.5% in FY16-18E owing to pick-up in execution cycle, gradual uptick in EBITDA margins We expect revenue CAGR of 15.8% in FY16-18E with EBITDA CAGR over the same period expected at 20.9%. Our PAT CAGR in FY16-18E is at ~12.5% as we have assumed a moderate rise in other income component in FY16E-18E over FY15 with depreciation exhibiting a CAGR of ~7%. Hence, we expect PAT at | 6675 crore in FY18E vs. | 5274 crore in FY16.


Exhibit 8: Trend in profitability…

2172.4

3481.4

4417.14006.8

4416.5 4729.5 4812.1 4746.85274.6

5693.1

6674.9

0

1000

2000

3000

4000

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7000

8000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E

(| c

rore

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-20-10010203040506070

(%)

PAT YoY growth


RoEs: Key for shareholder value creation by monetising subsidiaries

RoEs of the standalone base business used to average between 24% and 27% in FY08-10 but the same has declined to 16-17% in FY11-13 as L&T’s investments in BOT assets (road, power, urban infra) rose from | 5740 crore in FY10 to | 15168 crore in FY14. Investments in subsidiaries have grown at a CAGR of 22% (low base) in FY10-13. The management’s decision of significantly slowing down new BOT assets investment coupled with divesture of non strategic subsidiary, JVs and possible monetisation of L&T IDPL will reduce pressure on standalone RoEs.

Exhibit 9: Rising commitment to BOT assets have negative impact of base business RoEs

57407400

908410523

1152312723

13923

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FY10 FY11 FY12 FY13 FY14 FY15 FY16

(| c

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Investments YoY Growth (%)



Exhibit 10: Trend in RoEs

24.1

18.3 17.516.2

13.6 13.6 13.8 13.6 14.4

0

5

10

15

20

25

30

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E


The key impediment in the medium term would be the low utilisation of facilities at the shipbuilding business and the NPCIL JV, which are making losses at this juncture. Going ahead, as per the management, the shipbuilding business would be limited to | 100 crore.

Out of the above, a few service oriented subsidiaries are cash flow generators (L&T Infotech and L&T Finance Holdings) and will not burden the parent’s balance sheet for growth. Going ahead, the management expects to hive off Nabha Power and restructure L&T IDPL in FY17E, to ease pressure on the parent’s cash flows and meet funding requirements in developmental assets.

Going ahead, L&T’s management has clearly shifted its focus on reducing the equity funding stress on the base business balance sheet and simultaneously monetising non-strategic subsidiaries to raise future equity requirement for the subsidiary.

Going ahead, we expect L&T to report RoEs in the range of 13-14.5% for the standalone business in FY16-18E. However, the scenario may drastically change in FY19-20, as 1) L&T has already divested its entire stake in Dhamra port, which will free up equity required in developmental portfolio, 2) L&T has signalled a possible stake sale of 20-25% in IDPL wherein it has already roped in a strategic investor to the tune of | 2000 crore of equity, 3) losses of shipbuilding business (| 335 crore in FY14) will reduce significantly to | 100 crore in FY17E and if the capex cycle recovers on time with opening up of defence sector, these subsidiaries will turn into black by FY18E and 4) the company is close to selling its Nabha Power plant, general insurance business and also restructuring L&T IDPL. We believe these actions will be RoE accretive from FY18E onwards.

Value unlocking adds to shareholder wealth creation

Before L&T Finance Holdings was listed on the bourses, the Street assigned a valuation of 2x the book, implying a market capitalisation of around | 4,300 crore. However, when the shares where offered for IPO, the new discovered price for the company was | 52/share, translating to a total market capitalisation of | 8,900 crore, almost double its pre-listing value. Going ahead, we expect value unlocking in strategic subsidiaries like L&T Infotech and L&T IDPL to further add to shareholder wealth in the long run. The company has already filed a DRHP for the upcoming listing of its subsidiary L&T Infotech.


Outlook and Valuation Strong performance across all variables and strong guidance for FY17E in terms of order inflows and revenue growth will lead to re-rating of the stock. The management focus on reducing capital intensity by selling non-core subsidiaries (Nabha Power, general insurance and restructuring of L&T IDPL) will ease cash flow pressure on the parent’s balance sheet and impact RoEs positively (we factor in 60 bps improvement in RoEs to 14.4% by FY18E). On the financials front, we expect revenue, PAT to grow at a CAGR of 15.8%, 12.5% YoY, respectively, in FY16-18E. We highlight that from a two to three year perspective, L&T remains the best play on a capex cycle recovery in India and top large cap pick in the capital goods sector. We upgrade the target price of the stock from | 1475/share to | 1655/share with a BUY recommendation.

Exhibit 11: SOTP valuation for L&T

Company (|per share) Bull case % of total Base Case % of total Bear Case % of totalBase Business 1516 69.6 1190.8 72.0 866.0 73.4

L&T Finance Holdings 90 4.2 90 5.5 63 5.4

L&T Infotech 196 9.0 139.2 8.4 110.3 9.3

L&T Power Development 26 1.2 17.1 1.0 11.4 1.0

L&T MHI JV 20 0.9 11.4 0.7 8.5 0.7

L&T IDPL 262 12.0 157.3 9.5 83.9 7.1

Other E&C, MIP & E&E Subs 43 2.0 30.5 1.8 22.4 1.9

Hydrocarbon 24 1.1 17 1.0 15 1.2

Total 2176.8 100.0 1654.0 100.0 1180.6 100.0 Source: Company, ICICIdirect.com Research


Company snapshot

0

550

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Source: Bloomberg, Company, ICICIdirect.com Research Key events Date EventSep-10 L&T files DHRP for IPO of finance subsidairy L&T Finance Holdings Ltd. The IPO size was to the tune of | 1500 crore

Apr-11 L&T Metro Rail (Hyderabad) Ltd, the SPV incorporated to implement the Hyderabad Metro Project achieves financial closure for the project. The financial closure was achieved in a record time of six months

Dec-11 Mitsubishi Heavy Industries (MHI), Japan plans to sign a technological collaboration agreement with L&T Shipbuilding (LTSB) to provide a broad range of technological support for the construction of commercial vessels

Mar-12 L&T and Samsung Techwin Co, Ltd (STW) of South Korea announce they would be cooperating with the Indian Army’s Tracked Self Propelled Artillery Programme.

Mar-13 LT anoounces bonus issue in the ratio of 1:2. This means 1 bonus share for every 2 share held

Jul-13 L&T wins its biggest ever civil construction order worth |8250 crore to build a metro rail project in Saudi Arabia

Dec-13 L&T applies with FIPB for induction of strategic equity partner. The investor will invest equity of | 1000 crore each in two tranches.

Mar-14 L&T ends FY14 with another strong set of financial performance with revneues and order inflows up 19% and 15% YoY, respectively. Coupled with L&T sets strong set of guidance for FY15E performance

Sep-14 Weak execution mars L&T's perfromace in Q2FY15 even though L&T reported 17% YoY order inflows to the tune of | 39797 crore. The ghost of hydrocarbon bsuiness is gradullay receding back as L&T managed to post marginla EBIT loss of |54 crore as against |900 crore loss in Q1FY15.


Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m)1 Life Insurance Corporation of India 31-Mar-16 15.7 146.4 0.02 L&T Employees Welfare Foundation 31-Mar-16 12.3 114.8 3.13 UTI Asset Management Co. Ltd. 31-Mar-16 8.2 75.9 0.04 HDFC Asset Management Co., Ltd. 31-Mar-16 2.2 20.5 -0.35 General Insurance Corporation of India 31-Mar-16 1.8 17.1 -0.26 ICICI Prudential Asset Management Co. Ltd. 31-Mar-16 1.6 14.6 1.57 GIC Private Limited 31-Mar-16 1.5 13.8 0.58 ICICI Prudential Life Insurance Company Ltd. 31-Dec-15 1.3 11.7 0.19 Reliance Capital Asset Management Ltd. 31-Mar-16 1.2 11.0 0.110 BlackRock Institutional Trust Company, N.A. 30-Apr-16 0.9 8.5 0.0

(in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16Promoter 0.00 0.00 0.00 0.00 0.00FII 16.80 16.18 15.58 16.74 16.59DII 36.09 39.50 37.91 39.15 38.92Others 47.11 44.32 46.51 44.11 44.49

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor Name Value Shares Investor Name Value SharesL&T Employees Welfare Foundation +57.78M +3.15M Carmignac Gestion -87.70M -4.78MICICI Prudential Asset Management Co. Ltd. +26.77M +1.46M William Blair Investment Management, LLC -39.93M -2.07MNorges Bank Investment Management (NBIM) +22.94M +1.19M Waddell & Reed Investment Management Company -35.66M -1.85MGIC Private Limited +9.80M +0.53M Schroder Investment Management Ltd. (SIM) -27.56M -1.43MInvesco Hong Kong Limited +8.61M +0.47M JM Financial Asset Management Pvt. Ltd. -21.59M -1.18M

Buys Sells

Source: Reuters, ICICIdirect.com Research

Target Price | 1655


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Financial summary

Profit and loss statement | Crore (Year-end March) FY15 FY16 FY17E FY18ETotal operating Income 57,017.4 59,779.6 69,343.8 80,172.4Growth (%) 0.7 4.8 16.0 15.6Raw Material Expenses 6,777.6 8,958.5 8,122.6 9,384.7Employee Expenses 4,153.0 4,481.9 5,260.2 6,117.1Other Operating Expenses 33,312.7 32,997.8 40,110.0 46,358.6Sales, administration & Other Exp 1,984.1 2,498.6 2,516.5 2,905.3Other Manufacturing Expenses 4,302.2 4,660.8 5,496.7 6,375.4Total Operating Expenditure 50,529.5 53,597.6 61,505.9 71,141.1EBITDA 6,487.9 6,182.1 7,837.8 9,031.4Growth (%) -2.5 -4.7 26.8 15.2Depreciation 960.4 1,035.8 1,110.9 1,186.0Interest 1,419.0 1,449.0 1,483.6 1,425.3Other Income 2,283.4 2,394.7 2,450.0 2,600.0PBT 6,391.9 6,652.2 7,693.4 9,020.1Others 0.0 0.0 0.0 0.0Total Tax 1,645.1 1,377.7 2,000.3 2,345.2PAT 4,746.8 5,274.6 5,693.1 6,674.9Growth (%) -1.4 11.1 7.9 17.2EPS (|) 51.3 57.0 61.6 72.2


Cash flow statement | Crore (Year-end March) FY15 FY16 FY17E FY18EProfit after Tax 4,746.8 5,274.6 5,693.1 6,674.9Add: Depreciation 960.4 1,035.8 1,110.9 1,186.0(Inc)/dec in Current Assets -3,793.3 2,035.4 -9,393.0 -3,783.5Inc/(dec) in CL and Provisions 1,598.1 -1,859.8 6,482.9 1,510.5Others - - - - CF from operating activities 3,512.0 6,486.0 3,893.9 5,587.9(Inc)/dec in Investments -1,000.0 -500.0 -1,000.0 -1,000.0(Inc)/dec in Fixed Assets -1,050.0 -1,050.0 -1,050.0 -1,550.0Others 0.0 0.0 0.0 0.0CF from investing activities -2,000.0 -1,450.0 -1,950.0 -2,550.0Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0Inc/(dec) in loan funds 0.0 0.0 0.0 0.0Dividend paid & dividend tax -1,724.5 -1,933.5 -2,090.3 -2,299.3Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0Others 0.0 7.6 0.0 0.0CF from financing activities -224.5 66.5 -590.3 -1,299.3Net Cash flow 1,287.6 5,102.5 1,353.6 1,738.6Opening Cash 3,626.3 4,913.9 10,016.3 11,369.9Closing Cash 4,913.9 10,016.3 11,369.9 13,108.5


Balance sheet | Crore (Year-end March) FY15 FY16 FY17E FY18ELiabilitiesEquity Capital 123.1 123.1 123.1 123.1Reserve and Surplus 34,870.6 38,211.7 41,814.5 46,190.1Total Shareholders funds 34,993.7 38,334.8 41,937.6 46,313.2Total Debt 11,336.2 13,336.2 14,836.2 15,836.2Deferred Tax Liability 342.2 442.2 542.2 542.2Minority Interest / Others 0.0 0.0 0.0 0.0Total Liabilities 46,672.2 52,113.3 57,316.1 62,691.7

AssetsGross Block 13,529.8 14,529.8 15,520.9 16,520.9Less: Acc Depreciation 5,095.4 6,024.7 7,019.8 8,080.9Net Block 8,434.4 8,505.2 8,501.1 8,440.0Capital WIP 491.1 491.1 500.0 1,000.0Total Fixed Assets 8,925.4 8,996.2 9,001.1 9,440.0Investments 22,267.6 22,767.6 23,767.6 24,767.6Inventory 1,932.0 1,671.1 2,508.5 2,763.1Debtors 20,307.6 21,291.4 24,697.8 26,358.1Loans and Advances 7,293.1 5,858.5 8,010.3 9,627.7Other Current Assets 10,226.6 8,902.9 11,900.2 12,151.5Cash 4,913.9 10,016.3 11,369.9 13,108.5Total Current Assets 44,673.1 47,740.2 58,486.7 64,008.8Creditors 15,621.2 16,378.0 18,998.3 20,866.8Provisions 1,484.0 2,456.7 2,849.7 2,712.7Total Current Liabilities 29,361.3 27,501.5 33,984.4 35,494.9Net Current Assets 15,311.9 20,238.7 24,502.4 28,513.9Others Assets 0.0 0.0 0.0 0.0Application of Funds 46,672.2 52,113.3 57,316.1 62,691.7


Key ratios (Year-end March) FY15 FY16 FY17E FY18EPer share data (|)EPS 51.3 57.0 61.6 72.2Cash EPS 61.7 68.2 73.6 85.0BV 378.4 414.5 453.4 500.7DPS 16.5 18.5 20.0 22.0Cash Per Share 51.9 124.9 102.6 117.8Operating Ratios (%)EBITDA Margin 11.4 10.3 11.3 11.3PBT / Total Operating income 11.2 11.1 11.1 11.3PAT Margin 8.3 8.8 8.2 8.3Inventory days 11.3 12.3 11.0 12.0Debtor days 150.0 155.0 140.0 130.0Creditor days 120.0 130.0 100.0 95.0Return Ratios (%)RoE 13.6 13.8 13.6 14.4RoCE 11.9 10.0 11.8 12.6RoIC 13.4 12.8 14.2 15.4Valuation Ratios (x)P/E 27.7 24.9 23.1 19.7EV / EBITDA 21.2 21.5 17.4 15.1EV / Net Sales 2.4 2.2 2.0 1.7Market Cap / Sales 2.3 2.2 1.9 1.6Price to Book Value 3.8 3.4 3.1 2.8Solvency RatiosDebt/EBITDA 1.7 2.2 1.9 1.8Debt / Equity 0.3 0.3 0.4 0.3Current Ratio 1.5 1.6 1.7 1.8Quick Ratio 1.3 1.3 1.4 1.5



ICICIdirect.com coverage universe (Capital Goods) CMP M Cap

(|) TP(|) Rating (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17EAIA Engineering 930 765 Hold 8556 34.5 43.7 44.0 30.3 23.9 23.7 24.8 22.8 21.6 18.7 19.8 17.4

Thermax (THERMA) 710 822 Hold 8485 32.3 23.1 27.1 35.3 41.4 31.3 13.2 14.2 14.2 10.8 11.8 12.1

KEC International (KECIN) 130 150 Buy 3881 7.5 9.2 11.6 17.4 14.2 11.2 12.8 16.1 17.3 13.6 14.5 15.8

Kalpataru Power(KPP) 224 234 Buy 3438 10.9 11.8 15.6 20.6 19.0 14.4 12.7 12.1 13.5 8.6 8.5 10.3

L&T (LARTOU) 1265 1655 Buy 117013 51.3 43.5 56.3 24.6 29.1 22.5 11.9 9.2 12.0 13.6 10.8 12.9

Greaves Cotton (GREAVE) 139 177 Buy 3392 3.5 7.5 8.9 39.3 18.5 15.5 18.0 12.6 14.5 10.5 19.6 20.3

SKF 1215 1170 Hold 6171 38.5 48.8 45.9 31.6 24.9 26.5 21.6 20.1 21.0 14.3 13.1 14.0VaTech Wabag 570 823 Buy 3150 25.0 23.5 30.3 22.8 24.2 18.8 17.8 17.4 16.3 12.7 15.0 12.9NRB Bearing 115 122 Hold 1115 5.5 6.2 7.9 20.9 18.6 14.5 16.3 17.1 20.3 20.9 20.2 22.1Timken India 537 594 Buy 3652 11.9 13.5 16.6 45.2 39.8 32.4 28.1 27.6 28.3 18.4 18.1 18.4Grindwell Norton 640 823 Buy 3543 18.6 18.5 22.4 34.3 34.7 28.6 24.1 22.0 24.0 16.8 15.1 16.4

RoE (%)EPS (|) P/E (x) RoCE (%)



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