Larsen & Toubro. CMP: INR1,160 TP: INR1,417 Buy

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1 BSE SENSEX S&P CNX 16,216 4,908 Bloomberg LT IN Equity Shares (m) Week Range (INR) 1,868/971 1,6,12 Rel. Perf. (%) -4/-7/12 M.Cap. (INR b) M.Cap. (USD b) 13.1 * Consolidated; EPS is fully diluted 15 May QFY12 Results Update Sector: Capital Goods Larsen & Toubro CMP: INR1,160 TP: INR1,417 Buy 4QFY12 operational performance in line: Larsen and Toubro (LT) reported revenue growth of 21% YoY and EBITDA growth of 9% YoY for 4QFY12, largely in line with our estimates. PAT grew 22% YoY, higher than our estimate, supported by higher other income, lower interest and lower tax rates. Missed FY12 order intake guidance; EBITDA margin in line: In 4QFY12, order intake was INR212b, down 30% YoY. In FY12, order intake was INR706b, down 12%; the management had guided 5% growth. LT is seeing meaningful increase in order contribution from the Infrastructure segment while the share of Oil & Gas has declined significantly in the last two years. The contribution from overseas orders has also increased meaningfully. In FY12, E&C margins declined 95bp to 12.7% v/s management guidance of bp decline. Management guidance for FY13 a positive surprise: The management has guided 15-20% growth in order intake and revenue for FY13, and EBITDA margin within 50bp of FY12 level. Order intake of INR805b-840b in FY13 will be supported by INR120b-150b of project deferments in FY12, increase in contribution of international markets from 18% in FY12 to 25%, steady contribution of ~20% from the Buildings & Factories, Oil & Gas and Process Industries. Standalone profit to remain flat YoY; manufacturing JVs to impact consolidated profit: We expect standalone EPS (net of dividend from subsidiaries) to remain flat at INR67/INR68 for FY13/14 v/s INR67 in FY12. Revenue would grow at a CAGR of 10% while EBITDA margin would decline by 72bp over FY We estimate consolidated EPS at INR87 (+12%, upgrade of 5%) for FY13 and at INR89 (+2%, downgrade of 4%) for FY14. There exist headwinds to consolidated numbers, given poor business visibility for manufacturing JVs like Power BTG, Shipbuilding and Forgings, and investment in BOT projects. Our estimates do not fully capture the possible impact of capacity under-utilization in the initial periods. Maintain Buy with an SOTP-based target price of INR1,417. We value LT standalone at 14x FY14E earnings and subsidiaries at INR428/share. Satyam Agarwal (AgarwalS@MotilalOswal.com); Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com);

2 4QFY12 operational performance in line LT reported revenue growth of 21% YoY and EBITDA growth of 9% YoY for 4QFY12, largely in line with our estimates. PAT grew 22% YoY, higher than our estimate, supported by higher other income, lower interest and lower tax rate. Interest expense at INR1.2b was lower than our estimate of INR2.2b, led by better liquidity management, repayment of high cost debt and packing credit in foreign currency. Tax rate was 26.9% in 4QFY12 v/s our estimate of 38%. EBITDA margin declined 150bp YoY, impacted by increase in raw material cost, which increased by 230bp YoY as a percentage of sales. While staff cost was flat YoY, SG&A expenses were down 120bp YoY and other manufacturing expenses declined 40bp YoY. 4QFY12 revenue up 21% YoY; execution healthy EBITDA margin down 150bp YoY Missed FY12 order intake guidance; expect 15-20% growth in FY13 Missed FY12 order intake guidance: In 4QFY12, order intake was INR212b, down 30% YoY. In FY12, order intake was INR706b, down 12%; the management had guided 5% growth. Order intake was impacted by slowdown in the Power segment and sluggish industrial capex. In the Power segment, order intake declined 42%, while in Process Industries, order intake declined 39% YoY. The Oil & Gas segment witnessed strong order growth on a low base and Infrastructure segment orders grew 12%. Order intake (INR b) impacted by order deferments Order book to bill (BTB x) at 2.7x TTM 15 May

3 Contribution of export orders doubled: Export orders in the E&C segment grew 2x to INR113b and the contribution from exports has almost doubled in FY12. In the domestic market, E&C orders declined 22%. Meaningful change in order mix LT is seeing a meaningful increase in contribution of orders from the Infrastructure segment while the share of the Oil & Gas segment has significantly declined over the last two years. The Infrastructure segment contributed 48% of the intake v/s 38% in FY11 and 27% in FY10. The share of Oil & Gas declined to 10% from ~15% over the past three years and 20-25% prior to that. The contribution from overseas orders has also increased meaningfully. Overseas markets contributed 18% of the order intake in FY12, v/s 10% in FY11 and 5% in FY10. Order intake composition: Increased share of Infra/Power segments, lower contribution of Oil & Gas adverse for margins (%) Contribution from export to order intake doubled over last two years E&C segment revenue grew 22% YoY, margins in line with guidance E&C segment revenue grew 22% YoY while EBITDA margin declined 120bp YoY during the quarter. For FY12, EBITDA margin decline was in line with the management guidance of bp reduction. 15 May

4 Net working capital rises to 12% of sales from 8% in 4QFY11 NWC increased to 12% of revenue in 4QFY12 from 8% in 4QFY11. We expect NWC of 13-15% in the long term. This led to lower operating cash flows at INR11b v/s INR38b in 4QFY11. Gross debt on the book increased to INR99b from INR86b as at 2QFY12. Cash in hand stands at INR87b, down from INR90b in March Balance Sheet (INR b) Standalone Consolidated FY12 FY11 FY12 FY11 Net Worth Long Term Liabilities Total Capital Employed Fixed Assets Non current investments Other Non Current Assets Total Non Current Assets Current Assets Current Liabilities Net Current Assets Total Assets Subsidiaries' performance robust For FY12, L&T Infotech reported 29% growth in revenue while PAT grew 33%. Growth in revenue came primarily from North American markets and INR depreciation. This is encouraging, as profit margins were impacted by the expiry of STPI tax benefits. L&T Finance Holdings reported revenue growth of 42% and PAT growth of 16%. 15 May

5 Subsidiary performance (INR m) L&T Infotech 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 Sales (INR m) 4,730 4,690 5,120 4,570 5,670 5,890 6,010 7,010 7,380 7,760 8,350 8,170 Growth (%) 4.6 (17.3) (2.3) (8.4) PAT ,030 1,160 1,100 Growth (%) - (29.6) (2.7) Net Profit Margin (%) L&T Finance Holdings (NBFCs) (INR m) 4QFY12 4QFY11 FY12 FY11 YoY (%) 4QFY12 FY12 Loans and Advances 254, , , , Total Income 8,520 6,030 30,070 21, PAT 1,390 1,110 4,660 4, NIM (%) Gross NPA (%) Credit Losses (%) L&T Finance Holdings (PAT) 1, ,550 3, Average Net Worth 38,230 26,190 38,230 26, Valuation and view We expect standalone profits (net of dividend from subsidiaries) to remain flat over the next two years. Manufacturing JVs would have a negative impact on consolidated profits. Dividend income from subsidiaries was INR4.1b in FY12 (v/s INR2.3b in FY11); adjusted for this, standalone EPS for FY12 was INR67 (up 11%). We expect standalone EPS (net of dividend from subsidiaries) to remain flat at INR67/INR68 for FY13/14 v/s INR67 in FY12. Revenue would grow at a CAGR of 10% while EBITDA margin would decline by 72bp over FY We estimate consolidated EPS at INR87 (+12%, upgrade of 5%) for FY13 and at INR89 (+2%, downgrade of 4%) for FY14. There exist headwinds to consolidated numbers, given poor business visibility for manufacturing JVs like Power BTG, Shipbuilding and Forgings, and investment in BOT projects. Our estimates do not fully capture the possible impact of capacity under-utilization in the initial periods. Maintain Buy with an SOTP-based target price of INR1,417. We value LT standalone at 14x FY14E earnings and subsidiaries at INR428/share. 15 May

6 Larsen & Toubro: an investment profile Company description L&T is India's largest engineering and construction company. Apart from its core construction activity the company is making significant inroads into diverse range of products & services through its subsidiaries and manufacturing JVs in Power BTG, forging and shipbuilding. The company is also involved in various developmental projects on BOT basis in roads, ports, rails and power projects. Export contributes to around ~18% of the order intake. Key investment arguments L&T is well placed to capitalize on long-term infrastructure demand. L&T's order backlog is worth INR1458b implying BTB ratio of 2.7x TTM. We believe L&T is the best play on capex with its strong execution skills, diversified portfolio and strong balance sheet and will benefit from a likely pick up in demand. L&T's operational performance continues to be encouraging in a challenging environment. Revenue growth is robust, with management guiding for FY13 growth at 15-20%, on back of 21% growth in FY12. Margins have again shown some stability, given the premium positioning and various cost optimization / productivity enhancement measures being undertaken. Order intake is also expected to be steady with management guidance for 15-20% growth, despite a challenging macro environment. Comparative valuations L&T BHEL Thermax P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E Key investment concerns Order intake is driven by long gestation projects and is unlikely to favorably impact FY13 revenues and margins. Also key investments in manufacturing JVs and BOT projects are likely to be a drag on profits in the near term; impacting RoEs. An unfavorable political climate, logjams relating to clearances for projects stifle fresh order intake growth, hampering earnings growth. Recent developments In a long-awaited management succession exercise, L&T announced appointment of Dr. K Venkatramanan as its new CEO and Managing Director, while its current CMD, Mr. A M Naik would continue as the Executive Chairman for the next five years. L&T has lost to competitors in the NTPC bulk tenders 1 & 2 worth INR390b with nil orders. This is a significant loss given the tenders were expected to be important drivers for growth in BTG JV. Valuation and view On our estimates standalone revenues would grow at a CAGR of 10% while EBITDA margins would decline by 72bp over FY We estimate consolidated FY13 EPS at INR87 (+12%, upgrade of 5%) / FY14 at INR89/sh (+2%, downgrade of 4%). Maintain Buy with a SOTP-based TP of INR1,417/sh. Sector view We maintain our Neutral view on the sector EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 1,160 1, Buy Stock performance (1 year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others May

7 Financials and Valuation 15 May

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