CMP:
Rs. 1484.95; Market Cap: Rs. 1,38,144.74 Cr; 52 Week High/Low: Rs. 1893.80
/ Rs. 1401.00.
Total Shares: 93,02,98,999 shares; Promoters : Not Defined – 00.00 %; Total Public holding 5 % or more : 34,09,54,585 shares – 36.65 %; Total Public holding 1 % or more : 41,41,62,953 shares – 44.52 %; Public holding : 17,51,81,461 shares – 18.83 %; Book Value: Rs. 398.31; Face Value: Rs. 2.00; EPS: Rs. 52.26; Dividend: 812.50 % ; P/E: 28.41 times; Ind. P/E: 16.72; EV/EBITDA: 18.27. Total Debt: Rs. 90,698.61 Cr; Enterprise Value: Rs. 2,22,997.45 Cr.
Total Shares: 93,02,98,999 shares; Promoters : Not Defined – 00.00 %; Total Public holding 5 % or more : 34,09,54,585 shares – 36.65 %; Total Public holding 1 % or more : 41,41,62,953 shares – 44.52 %; Public holding : 17,51,81,461 shares – 18.83 %; Book Value: Rs. 398.31; Face Value: Rs. 2.00; EPS: Rs. 52.26; Dividend: 812.50 % ; P/E: 28.41 times; Ind. P/E: 16.72; EV/EBITDA: 18.27. Total Debt: Rs. 90,698.61 Cr; Enterprise Value: Rs. 2,22,997.45 Cr.
LARSEN & TOUBRO LTD: LARSEN
& TOUBRO LTD was founded in 1938. Larsen
& Toubro Limited operates as a technology, engineering, construction, and
manufacturing company worldwide. Larsen’s divisions include Engineering and
Construction Projects (E&C), Heavy Engineering (HED), Engineering
Construction and Contracts (ECC), Electrical and Electronics (EBG), Machinery
and Industrial Products (MIPD), and Information Technology & Engineering
Services. These divisions undertake engineering design and construction of
infrastructure and industrial projects, including civil, mechanical, and
electrical & instrumentation engineering. The customer profile includes
names, such as Samsung, Chevron, Bechtel, Kvaerner, Pirelli, Siam Michelin, and
Goodyear. The Heavy Engineering (HED) division manufactures and supplies custom
designed and engineered critical equipment and systems to the needs of
core-sector industries and the defense sector. It is the preferred supplier of
equipment for a select range of products, globally. The Division has entered
into Shipbuilding business and engages in construction of specialty commercial
vessels and warships for the navy, as well as the coast guard. The Engineering Construction and Contracts
(ECC) division delivers engineering, procurement, and contract solutions in the
oil and gas, petrochemicals, power, and water space industries. The Electrical
and Electronics (EBG) division offers solutions in low & medium voltage
categories. Its businesses consists of switchgear, switchboards for different
applications, including marine, meters, automation systems, petroleum
dispensing pumps, medical equipment and tooling solutions and has operations at
different locations in India (two in Mumbai and one each in Ahmednagar, Mysore,
Faridabad and Coimbatore) and one unit for manufacturing operations in China.
The Information Technology and Engineering Services Information and Technology
Services division offers e-Engineering solutions, including product design and
engineering analysis, engineering process support, production and plant
engineering, asset information management, and design automation to high end
technology verticals, such as automotive, aerospace, marine and ship design,
plant engineering, and industrial products. This division also provides
embedded systems and solutions comprising supply of hardware, application
software, and enclosure design for electronics product design and development
in automotive, medical, semiconductor, and industrial products. On November 30,
2009, Nuclear Power Corporation Of India Limited and Larsen & Toubro Ltd.
announced the formation of a JV company to produce special steels and ultra-heavy
forgings. On January 22, 2010, Larsen & Toubro Ltd. formed a JV with
Sapuracrest Petroleum Bhd to undertake installation of pipelines and
construction of offshore rigs and platforms in India, West Asia and South East
Asia. In July 2012, L&T’s subsidiary Tamco Switchgear acquired Henikwon
Corporation Sdn Bhd. L&T does business in Malaysia, the United States, the
Unite Kingdom, Brazil, Saudi Arabia, the United Arab Emirates, Qatar,
Bangladesh, and Sri Lanka. Larsen & Tubro Ltd is compared globally with Hyundai
Development Company Ltd of South Korea, Daelim Industrial Company Ltd of South
Korea, Nippo Corporation of Japan Ssangyong Engineering & Construction,
Aker Solutions ASA and JTEKT Corporation.
Investment Rationale:
Outlook and Valuation:
Larsen & Toubro’s (L&T) is a USD 15 billion technology, engineering, construction, projects,
manufacturing and financial services conglomerate, with global operations. The
company is engaged in core, high-impact sectors – infrastructure, construction,
defence, hydrocarbon, heavy engineering, power, aerospace, shipbuilding,
electrical & automation, mining and metallurgy. Its integrated capabilities
span the entire spectrum of 'design-to-deliver', and it offers turnkey EPC
solutions in its major business lines. Its track record covers products,
projects and processes executed to international benchmarks. Every aspect of
L&T's businesses is characterized by professionalism and high standards of
corporate governance. Sustainability is embedded into its long-term strategy
for growth. The Company's manufacturing footprint extends across multiple
countries in addition to India. L&T has several international offices and a
supply chain that extends around the globe. It has projects like Airports in India and the
Middle East Metro rail systems for Riyadh, Qatar and major Indian cities. Projects
in large infrastructure include bridges and highways - from Jordan to Malaysia.
In Technology, L&T is contributing to key missions like the building of
India's first nuclear-powered submarine, maiden missions to the moon and Mars.
For Hydrocarbon projects in the Middle East, Africa, South East Asia and India,
L&T is building the world's longest heated and insulated oil pipeline. Also
building the world's largest coal gasifier made in India and exported to China.
L&T has continuously
evolved by building new skill sets and competencies to effectively benefit from
emerging trends, and hence L&T focuses on Portfolio rationalization.
L&T has incubated and grown service businesses like IT and finance on a
wide range. It is also expanding the share of manufacturing businesses like
power BTG, defence, and forgings, by creating independent companies for
different businesses and listing subsidiaries, it has kept business structure
simple and promoted managerial talent. Also L&T is
attempting to correct capital allocation through various initiatives & focusing on improving RoE through monetization
of mature assets, exiting non-core activities, and fund infusion (including
listing of subsidiaries) and this will improve its consolidated RoE. L&T has
invested near about Rs. 100b in setting up manufacturing businesses for
defense, power BTG, forgings, which are difficult to replicate and this will position
L&T as a dominant player. The Indian capex cycle is believed to be on recovery
mode. The recent burst of policy measures would ease environment for capex. This
will call economists to cut rates, and will give thrusts to stronger recovery
of Capex and a full-fledged recovery will be seen only in FY2017. The slowdown
in order inflows from the Middle East markets coupled with revival in domestic
capex cycle should lead to a shift in the order inflow mix more towards the
domestic markets, going forward. On the back of shift in order book towards
domestic markets, there could be a uptick in execution. Accordingly, L&T
could have a 16.2 % top-line CAGR over FY2015-2017E. Given that L&T is
currently sitting on an order book which gives revenue visibility for over 30
months, this shift in order inflow mix should help the company in faster margin
recovery, expanding its EBITDA margins by 0.32 % during FY2015-17 to 11.7 %. The
company retained its guidance on both revenue and order intake growth at 15 %
for FY16, while EBITDA margins are expected to rise by 100bp (ex-services
business) on account of loss avoidance from the hydrocarbons business. Core E&C
revenue could double over the next three years, as domestic intake in FY15 was
INR943b while revenue was INR460b. The Portfolio churn’ in concession portfolio
and service segments would aid value unlocking as L&T Infotech & Tech
Services IPO is being expected by July 2016. On
Financial side the Q1FY16 Standalone revenue of L&T grew 4 % YoY to Rs. 1,0710
crore. Its Infrastructure segment posted strong revenue growth of 16 % YoY
while power segment, after many quarters of decline, grew 12 % YoY in Q1FY16.
In Q1FY16, the hydrocarbons segment reported a robust 41 % jump in revenues
coupled with positive 4 % EBITDA margin. L&T recorded a 21 % YoY decline in consolidated
order inflows given the high base of order intake in Q1FY5. Hence, order
inflows for Q1FY16 were at Rs. 26376 crore. The order backlog as of Q1FY16
stood at Rs. 2,39,000 crore, up 22 % YoY. Order inflows have perked up in FY15
(Rs 1.4tn, up 19 % YoY) and consolidated order backlog is up 28 % YoY to Rs
2.3tn. With an expected pickup in domestic projects execution management has
guided for 15 % growth in consolidated order inflow & revenue for FY16. L&T is very
well positioned to benefit from gradual recovery in the domestic capex cycle,
given its diverse range of sectoral exposure, strong balance sheet and better
cash flow generating potential in comparison to its peers, which are struggling
with higher leverage, and strained cash flows. L&T is an established leader with
excellent execution track record over many business cycles. And L&T remains
the best proxy to investment revival in India. Hydrocarbon business should also
come out of red in FY16 as the company has finished losses on low margin legacy
orders. At the current market price of Rs. 1,484.95, the stock is trading at a PE of 25.91 x FY16E and 20.39 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 57.30 in FY16E and Rs. 72.80 in FY17E. The fair value of L&T on stand-alone basis using SOTP comes at Rs. 1,880 per share, while the valuation of its investments in subsidiaries comes at Rs. 408.12 per share. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
Business Subsidiary
|
Value Per Share (in ₹ Rs.)
|
L&T Core Business
|
1,470.00
|
L&T Hydrocarbons
|
16.00
|
L&T Infotech
|
137.00
|
L&T Finance*
|
76.12
|
Infra Development projects
|
69.00
|
Power Development projects
|
37.00
|
Power Equipments Venture
|
7.00
|
Shipbuilding & Container Port
|
23.00
|
Sp. Steel & Heavy Forging Venture
|
9.00
|
Other Investments
|
34.00
|
TOTAL
|
1,878.12
|
| KEY FINANCIALS | FY14 | FY15 | FY16E | FY17E |
|---|---|---|---|---|
| SALES (₹ Crs) | 56,598.89 | 57,017.40 | 65,529.90 | 78,635.80 |
| NET PROFIT (₹ Cr) | 5,493.10 | 5,056.20 | 5,329.20 | 6,768.90 |
| EPS (₹) | 52.90 | 50.60 | 57.30 | 72.80 |
| PE (x) | 30.70 | 29.10 | 30.22 | 24.10 |
| P/BV (x) | 4.00 | 3.70 | 3.40 | 3.10 |
| EV/EBITDA (x) | 20.80 | 18.80 | 18.90 | 15.20 |
| ROE (%) | 12.80 | 13.20 | 11.70 | 13.60 |
| ROCE (%) | 9.00 | 8.00 | 7.60 | 8.90 |
*As the author of this blog I disclose that I do not hold LARSEN & TUBRO Ltd in my any of the portfolios.
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