Larsen & Toubro (LT IN) Shines on all parameters and we get constructive

INSTITUTIONAL EQUITY RESEARCH Larsen & Toubro (LT IN) Shines on all parameters and we get constructive INDIA CAPITAL GOODS Quarterly Update Top takeaways from 2QFY19 Recurring PAT (Rs 19.4bn, 15% yoy) was 10%/17% above our/consensus estimates. Higher than expected execution led to the beat in earnings. 4 th consecutive quarter of double digit growth in domestic E&C revenues, which grew 29% yoy. Even after excluding the lumpy revenue recognition by the reality division domestic E&C sales grew 25% yoy. However, segmental profits continued to be driven by IT & Financial services, 44% of segmental EBIT (vs. 31% in 2QFY18). Margins for its core infrastructure segment contracted 30bps to 5.6% despite healthy 21% yoy segmental revenue growth. Ex services order inflows (Rs 339bn) grew 51% yoy as domestic orders (85% of total) doubled yoy. International orders declined 37% yoy. L&T s working capital intensity was flat sequentially despite pick up in execution. Key highlights: Revenues at Rs 321bn (+21% yoy) were driven by domestic sales (27% yoy) while international revenues grew 12% yoy. All sectors except power and defence (cumulatively 6% of sales) reported robust revenue growth. Infrastructure segment revenues (47% of sales) grew 20% yoy on better domestic execution. EBITDA (Rs 37.7bn) grew 29% yoy on 55bps yoy margin expansion to 11.8%. E&C EBITDA grew 32% yoy on improved job mix in heavy engineering, bunched up margin recognition in defence and realty despite weaker profitability for the Infrastructure and Hydrocarbon segments. Operating profit for Services grew 60% yoy. Conference call takeaways Execution environment for large infrastructure projects has improved, thrust by state and central government s is helping execution. Aggregate prospects of Rs 4tn for 2HFY19 with Infra (ex Power T&D) accounting for 50%, Hydrocarbons 20%, Power T&D 24% and Metals+Heavy engineering is 6%. Outlook and valuation: Near term headwinds in form of liquidity constraints and potential slowdown in domestic ordering due to elections could impact L&T s execution, working capital and new order wins in 2HFY19. However, we believe (1) incrementally, the environment for execution has improved if we were to see through the recent liquidity crisis. L&T s strong order book (2.8x TTM sales) and controlled working capital allow it headroom to push for execution; and (2) opportunity pipeline for new orders remains robust and we expect L&T to gain market share as complexity of projects increase over next three years coupled with buoyant oil prices a pickup in ordering from the Middle East could offset the temporary slowdown in domestic orders. Hence we upgrade our rating on L&T to Buy (from Neutral) as we believe L&T is best placed to weather near term challenges. We marginally raise our FY19/20 estimates after accounting for the share buyback. However, our estimates bake in the impact flat infrastructure margins over FY19 21 and lower profitability in IT and Financial services in FY20 21 as their performance peaks in FY19. However, we do not build in inflows from the E&A divesture and potential benefits from monetization of real estate alongside Hyderabad metro. We revise our SOTP based target price to Rs 1,530 from Rs 1,415 earlier. We ascribe 23x PE (June 2020) to L&T s core operations vs. 21x (March 2020) earlier. Key risk: Deterioration in infrastructure segment margins. 1 November 2018 BUY (Upgrade) CMP RS 1297/ TARGET RS 1530 (+18%) COMPANY DATA O/S SHARES (MN) : 1402 MARKET CAP (RSBN) : 1781 MARKET CAP (USDBN) : 24.2 52 WK HI/LO (RS) : 1470 / 1176 LIQUIDITY 3M (USDMN) : 49.7 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Sep 18 Jun 18 Mar 18 FII / NRI : 19.2 18.9 19.0 FI / MF : 38.4 38.9 39.1 NON PRO : 16.1 16.1 16.0 PUBLIC & OTHERS : 26.3 26.1 25.9 KEY FINANCIALS Rs bn FY18 FY19E FY20E Net Sales 1,190.3 1,381.9 1,583.2 EBIDTA 133.1 179.1 197.2 Net Profit 72.6 86.8 92.6 EPS, Rs 51.8 64.6 68.8 PER, x 25.0 20.1 18.8 EV/EBIDTA, x 21.1 16.1 14.9 PBV, x 3.3 3.3 2.9 ROE, % 13.7 16.0 16.5 Debt/Equity (%) 193.2 227.9 216.5 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E Revenue 1,381.9 1,583.2 3% 2% EBITDA 179.1 197.2 8% 3% Core PAT 86.8 92.6 4% 2% EPS (Rs) 64.6 68.8 9% 2% Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in (Rs mn) Q2FY19 Q2FY18 Change yoy vs. expect. Comments Order book 28,11,660 25,75,260 9% 2% Order inflows 4,19,210 2,87,320 46% 8% Led by robust domestic orders infrastructure as well as in power segments Sales 3,20,808 2,64,468 21% 8% Driven by growth across all segments except power and defence engineering EBITDA 37,705 29,622 27% 4% EBITDA margin (%) 11.8% 11.2% 55 bps 48 bps Majorly contributed by the IT and Financial services Recurring PAT 19,357 16,831 15% 11% Page 1 PHILLIPCAPITAL INDIA RESEARCH

Consolidated results L&T consolidated quarterly results Rs Mn Q2FY19 Q2FY18 Change yoy Order inflows 4,19,210 2,87,320 46% Domestic 3,36,530 1,83,120 84% International 82,680 1,04,200 21% Order book 28,11,660 25,75,260 9% Domestic 21,98,660 18,97,260 16% International 6,13,000 6,78,000 10% Net Sales 3,20,808 2,64,468 21% Domestic 2,14,508 1,69,298 27% International 1,06,300 95,170 12% Gross Profit 1,03,811 82,767 25% Gross margin (%) 32.4% 31.3% 106 bps Employee costs (45,691) (37,949) 20% Other expenses (20,415) (15,197) 34% EBITDA 37,705 29,622 27% EBITDA margins (%) 11.8% 11.2% 55 bps Depreciation (5,155) (4,306) 20% EBIT 32,550 25,316 29% Interest (3,993) (3,930) 2% Other Income 4,253 3,997 6% PBT 32,810 25,382 29% Tax (8,861) (5,439) 63% Effective tax rate (%) 27% 21% 558 bps PAT pre Minority 23,949 19,943 20% PAT margin (%) 7.5% 7.5% 8 bps Less: Minority Interest (3,629) (2,004) 81% Add: Profits of Associates (962) (1,107) 13% Recurring PAT 19,357 16,831 15% Exceptional 2,948 1,367 116% Reported PAT 22,305 18,199 23% Recurring EPS (Rs) 13.8 12.0 15% Group segment wise order inflows Y/E Mar, Rs mn Q2FY19 Q2FY18 Change yoy Infrastructure* 2,34,060 1,38,497 69% Power 24,850 2,635 843% Heavy Engineering* 12,960 18,470 30% Defence Engineering* 11,950 na Hydrocarbon 27,440 45,310 39% E&A 16,291 14,366 13% Others* 11,569 4,702 146% Order Inflows ex services 3,39,120 2,23,980 51% Domestic ex services 2,89,669 1,45,459 99% International ex services 49,451 78,522 37% Services 80,090 63,340 26% Domestic Services 46,861 37,662 24% International Services 33,229 25,679 29% Order Inflows total 4,19,210 2,87,320 46% Domestic 3,36,530 1,83,120 84% International 82,680 1,04,200 21%, * not comparable due to restatement Group segment wise order book Y/E Mar, Rs mn Q2FY19 Q2FY18 Change yoy Infrastructure 21,82,610 19,09,820 14% Power 92,830 1,04,720 11% Heavy Engineering 49,910 1,21,520 59% Defence Engineering 1,18,850 na Hydrocarbon 2,79,270 2,51,990 11% E&A 30,580 29,400 4% Others 57,610 1,57,810 63% Total Order book 28,11,660 25,75,260 9% Page 2 PHILLIPCAPITAL INDIA RESEARCH

L&T Consolidated segment revenue Rs Mn Q2FY19 Q2FY18 Change yoy Infrastructure 1,54,076 1,27,903 20% Power 10,599 16,673 36% Heavy Engineering 5,441 3,620 50% Defence Engineering 9,624 9,857 2% Hydrocarbon 35,580 25,614 39% E&A 14,897 13,093 14% IT&TS 36,065 27,238 32% Financial Services 31,389 24,130 30% Development Projects 12,971 12,184 6% Others 14,880 9,047 64% Segment gross revenue 3,25,521 2,69,360 21% Less: Intersegment (4,713) (4,892) 4% Net revenue 3,20,808 2,64,468 21% L&T Consolidated segment EBIT Y/E Mar, Rs mn Q2FY19 Q2FY18 Change yoy Infrastructure 8,704 7,590 15% Power 526 790 33% Heavy Engineering 1,025 283 262% Defence Engineering 1,988 709 181% Hydrocarbon 3,129 2,450 28% E&A 2,093 1,496 40% IT&TS 7,989 5,304 51% Financial Services 7,982 3,016 165% Development Projects (460) 3,776 112% Others 3,099 1,544 101% Segment EBIT 36,075 26,958 34% Less: Intersegment margins 29 89 67% Add: Un allocable income, net (3,554) (1,731) 105% EBIT 32,550 25,316 29% EBIT margin (%) Infrastructure 5.6% 5.9% 29 bps Power 5.0% 4.7% 22 bps Heavy Engineering 18.8% 7.8% 1101 bps Defence Engineering 20.7% 7.2% 1347 bps Hydrocarbon 8.8% 9.6% 77 bps E&A 14.1% 11.4% 263 bps IT&TS 22.2% 19.5% 268 bps Financial Services 25.4% 12.5% 1293 bps Development Projects 3.5% 31.0% 3454 bps Others 20.8% 17.1% 376 bps Segment EBIT 11.1% 10.0% 107 bps Page 3 PHILLIPCAPITAL INDIA RESEARCH

Standalone Results L&T Standalone quarterly results Rs Mn Q2FY19 Q2FY18 Change yoy Net Sales 1,86,488 1,58,625 18% Gross Profit 41,149 32,286 27% Gross margin (%) 22.1% 20.4% 171 bps Employee costs (15,953) (14,211) 12% Other expenses (8,607) (4,971) 73% EBITDA 16,590 13,104 27% EBITDA margins (%) 8.9% 8.3% 64 bps Depreciation (2,595) (2,595) 0% EBIT 13,995 10,509 33% Interest (3,697) (3,673) 1% Other Income 7,238 6,593 10% PBT 17,535 13,429 31% Tax (4,966) (3,559) 40% Effective tax rate (%) 28.3% 26.5% 182 bps Recurring PAT 12,569 9,870 27% Exceptional 4,968 1,749 184% Reported PAT 17,537 11,619 51% L&T Standalone segment revenue Rs Mn Q2FY19 Q2FY18 Change yoy Infrastructure 1,43,455 1,16,393 23% Power 10,599 16,673 36% Heavy Engineering 5,441 3,519 55% Defence Engineering 8,860 9,953 11% E&A 11,754 10,327 14% Others 8,129 3,967 105% Segment gross revenue 1,88,237 1,60,832 17% Less: Intersegment (1,749) (2,206) 21% Net revenue 1,86,488 1,58,625 18% L&T Standalone segment EBIT Y/E Mar, Rs mn Q2FY19 Q2FY18 Change yoy Infrastructure 7,652 6,545 17% Power 526 791 33% Heavy Engineering 1,027 490 110% Defence Engineering 2,366 1,013 134% E&A 2,051 1,491 38% Others 1,942 1,145 70% Segment EBIT 15,564 11,474 36% Less: Intersegment margins na Add: Un allocable income, net (1,569) (965) 63% EBIT 13,995 10,509 33% EBIT margin (%) Infrastructure 5.3% 5.6% 29 bps Power 5.0% 4.7% 22 bps Heavy Engineering 18.9% 13.9% 495 bps Defence Engineering 26.7% 10.2% 1653 bps E&A 17.4% 14.4% 301 bps Others 23.9% 28.9% 496 bps Segment EBIT 8.3% 7.1% 113 bps Page 4 PHILLIPCAPITAL INDIA RESEARCH

Financials Income Statement Y/E Mar, Rs bn FY17 FY18 FY19e FY20e Net sales 1,093.1 1,190.3 1,381.9 1,583.2 Growth, % 8 9 16 15 Total income 1,093.1 1,190.3 1,381.9 1,583.2 Raw material expenses 773.4 829.5 956.3 1,091.1 Employee expenses 138.5 152.9 177.8 198.6 Other Operating expenses 69.9 74.8 68.6 96.4 EBITDA (Core) 111.3 133.1 179.1 197.2 Growth, % 6.4 19.6 34.6 10.1 Margin, % 10.2 11.2 13.0 12.5 Depreciation 23.7 19.3 22.7 29.8 EBIT 87.6 113.8 156.5 167.4 Growth, % 1.0 29.9 37.5 7.0 Margin, % 8.0 9.6 11.3 10.6 Interest paid 13.4 15.4 17.2 19.1 Other Non Operating Income 13.4 14.1 12.2 9.9 Pre tax profit 87.7 112.6 151.4 158.1 Tax provided 21.5 29.3 46.3 48.6 Profit after tax 66.2 83.3 105.1 109.5 Others (Minorities, Associates) 7.0 10.7 18.3 16.9 Net Profit 59.2 72.6 86.8 92.6 Growth, % 43.0 22.6 19.6 6.7 Net Profit (adjusted) 59.2 72.6 86.8 92.6 Unadj. shares (m) 1,399 1,401 1,343 1,346 Wtd avg shares (m) 1,399 1,401 1,343 1,346 Balance Sheet Y/E Mar, Rs bn FY17 FY18 FY19e FY20e Cash & bank 53.1 80.3 71.1 88.0 Debtors 286.9 346.5 383.9 431.8 Inventory 41.4 48.5 56.8 65.1 Loans & advances 720.6 882.6 970.9 1,068.0 Other current assets 505.2 597.9 677.8 772.1 Total current assets 1,607.2 1,955.9 2,160.6 2,425.0 Investments 197.5 153.1 129.0 129.0 Gross fixed assets 204.0 244.0 306.0 361.0 Less: Depreciation 38.9 58.2 80.9 110.7 Add: Capital WIP 134.7 134.4 124.4 94.4 Net fixed assets 299.8 320.2 349.6 344.8 Total assets 2,104.5 2,429.2 2,639.2 2,898.8 Current liabilities 604.0 718.5 806.2 901.9 Provisions 34.3 37.5 43.9 50.5 Total current liabilities 638.4 756.1 850.1 952.3 Non current liabilities 928.3 1,060.3 1,190.6 1,270.7 Total liabilities 1,566.7 1,816.4 2,040.7 2,223.1 Paid up capital 1.9 2.8 2.7 2.7 Reserves & surplus 500.3 553.8 526.3 591.3 Shareholders equity 537.8 612.8 598.5 675.7 Total equity & liabilities 2,104.5 2,429.2 2,639.2 2,898.8 Cash Flow Y/E Mar, Rs bn FY17 FY18 FY19e FY20e Pre tax profit 87.7 112.6 151.4 158.1 Depreciation 23.7 19.3 22.7 29.8 Chg in working capital 31.1 203.7 119.9 145.3 Total tax paid 25.4 33.0 46.3 48.6 Cash flow from operating activities 62.3 103.6 12.9 3.3 Capital expenditure 28.1 39.8 52.0 25.0 Chg in investments 86.7 44.4 24.1 0.0 Cash flow from investing activities 97.4 19.9 13.6 15.1 Free cash flow 35.1 83.7 0.7 11.8 Equity raised/(repaid) 60.4 54.4 27.6 65.0 Debt raised/(repaid) 58.2 135.7 130.3 80.2 Dividend (incl. tax) 22.8 26.0 27.1 27.1 Other financing activities 60.3 63.1 79.0 84.7 Cash flow from financing activities 35.3 110.9 8.5 28.7 Net chg in cash 0.2 27.3 9.2 16.9 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 42.3 51.8 64.6 68.8 Growth, % 42.8 22.4 24.8 6.5 Book NAV/share (INR) 358.8 397.2 393.9 441.4 FDEPS (INR) 42.3 51.8 64.6 68.8 CEPS (INR) 59.2 65.5 81.5 91.0 CFPS (INR) 29.6 (84.9) (3.2) (11.8) DPS (INR) 14.0 16.0 18.2 18.1 Return ratios Return on assets (%) 3.8 4.2 4.6 4.4 Return on equity (%) 12.5 13.7 16.0 16.5 Return on capital employed (%) 5.4 6.0 6.8 6.6 Turnover ratios Asset turnover (x) 0.9 0.9 0.9 0.9 Sales/Total assets (x) 0.5 0.5 0.5 0.6 Sales/Net FA (x) 3.7 3.8 4.1 4.6 Working capital/sales (x) 0.9 1.0 0.9 0.9 Working capital days 317.2 354.8 339.0 330.9 Liquidity ratios Current ratio (x) 2.7 2.7 2.7 2.7 Quick ratio (x) 2.6 2.7 2.6 2.6 Interest cover (x) 6.5 7.4 9.1 8.7 Dividend cover (x) 3.0 3.2 3.6 3.8 Total debt/equity (%) 187.1 193.2 227.9 216.5 Net debt/equity (%) 176.5 178.8 214.5 201.6 Valuation PER (x) 30.7 25.0 20.1 18.8 PEG (x) y o y growth 0.7 1.1 0.8 2.9 Price/Book (x) 3.6 3.3 3.3 2.9 Yield (%) 1.1 1.2 1.4 1.4 EV/Net sales (x) 2.5 2.4 2.1 1.9 EV/EBITDA (x) 24.3 21.1 16.1 14.9 Estimates Page 5 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 1700 1500 1300 1100 N (TP 1280) N (TP 1750) N (TP 1220) N (TP 1390) N (TP 1390) N (TP 1415) 900 B (TP 1662) N (TP N 1420) (TP N 1420) (TP 1400) N (TP 1565) N (TP 1400) 700 N (TP 1220) 500 O 15 D 15 J 16 M 16A 16 J 16 J 16 S 16 O 16 D 16 J 17 M 17A 17 N (TP 1750) J 17 A 17 O 17 N 17 J 18 F 18 A 18M 18 J 18 A 18 S 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 6 PHILLIPCAPITAL INDIA RESEARCH

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