Revenues a positive surprise...so is other income! July 23, 2012 Rupa Shah rupashah@plindia.com +91-22-66322244 Rating Accumulate Price Rs1,378 Target Price Rs1,517 Implied Upside 10.1% Sensex 16,877 Nifty 5,118 (Prices as on July 23, 2012) Trading data Market Cap. (Rs bn) 839.1 Shares o/s (m) 608.9 3M Avg. Daily value (Rs m) 3495.2 Major shareholders Promoters 0.00% Foreign 14.07% Domestic Inst. 38.41% Public & Other 47.52% Stock Performance (%) 1M 6M 12M Absolute 1.2 7.9 (24.6) Relative 1.7 7.1 (14.7) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2013 77.4 76.1 1.8 2014 86.8 84.3 3.0 Price Performance (RIC: LART.BO, BB: LT IN) (Rs) 2,000 1,500 1,000 500 0 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Revenues surprisingly higher, EBITDA margins below expectations: Larsen and Toubro (L&T) reported a healthy 26.1% YoY growth in net sales at Rs119bn in Q1FY13 (largely benefitted from robust order inflows in roads/buildings and on track execution) and was largely above our expectations of Rs106bn. Reported EBITDA included a forex MTM of Rs2.7bn and write-backs worth Rs500m. Adjusting to these items margin are expected to be 80bps lower YoY at 10.9% and below our expectations. Interest continues to be higher by 45% YoY, mainly on account of increased capex/wc needs and borrowings thereof. OI (aided by dividend from subsidiaries and higher treasury incomes at Rs2.2bn) was the major delta in earnings which was higher by 125% YoY and 96% QoQ at Rs6.1bn. Thus, PAT at Rs8.6bn, grew by 15.7% YoY. Adjusting to some one-off items, APAT is estimated to be at Rs8.5bn versus our expectation of Rs8bn. Sectoral performance: E&C division registered a revenue growth of 30%, with 10.9% EBITDA margins (90bps down YoY). E&E business registered 3% sales growth, with EBITDA margin of 13.5% (110bps higher YoY). MIP business continued to show a weak performance, with 18% de-growth in sales and 460bps decline in EBITDA margins at 15.5%. Others segment, though small, continues to be robust, with 80% YoY growth in sales at Rs3.5bn and a 770bps YoY improvement in EBITDA margins at 30.9%, mainly led by rupee depreciation and better capacity utilisation. Order inflow details of the undisclosed part: L&T had announced Rs151.5bn orders in Q1FY13 on exchanges. However, the declared order inflows came in at Rs196bn. The difference of Rs44.5bn orders are explained by Rs37.3bn order from Amravati Jalgaon Road project and Rs8.2bn (constituting small-sized projects) from infrastructure projects across verticals, where clients are not disclosed. Management, in Q4FY12, had indicated Rs120-150bn worth of orders to spillover to Q1FY13 from FY12. Out of this, Rs78bn is booked as order inflow in Q1FY13. Contd 2 Key financials (Y/e March) 2011 2012 2013E 2014E Revenues (Rs m) 434,959 531,705 639,286 739,978 Growth (%) 18.6 22.2 20.2 15.8 EBITDA (Rs m) 52,136 62,826 72,095 83,729 PAT (Rs m) 36,720 44,196 47,429 53,172 EPS (Rs) 60.3 72.2 77.4 86.8 Growth (%) 14.7 19.7 7.3 12.1 Net DPS (Rs) 11.5 13.1 13.1 13.1 Profitability & Valuation 2011 2012 2013E 2014E EBITDA margin (%) 12.0 11.8 11.3 11.3 RoE (%) 18.3 18.8 17.9 18.3 RoCE (%) 15.2 15.2 14.1 14.4 EV / sales (x) 2.1 1.7 1.5 1.3 EV / EBITDA (x) 17.1 14.7 13.0 11.4 PE (x) 22.9 19.1 17.8 15.9 P / BV (x) 3.8 3.3 3.0 2.8 Net dividend yield (%) 0.8 0.9 0.9 0.9 Q1FY13 Result Update Source: Bloomberg Source: Company Data; PL Research * adjusting for subsidiaries PrabhudasLilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
FY13E order inflow target achievement a challenging task; however, OB still robust at Rs1.6trn: L&T, in Q1FY13, bagged orders worth Rs195bn, a growth of 21% YoY and down by 7.6% QoQ. The company has maintained the order inflow guidance of 15-20% YoY which amounts to Rs811bn. Though T&D has also grown, the company has lost considerable projects to competitors in the domestic market. Big chunks of orders are needed from Hydrocarbon and Utilities (including Hydro), along with stable and strong orders from Infrastructure sector (which the company is upbeat on), to draw it closer to the target. We still maintain a flat YoY order intake view in the absence of any signs of Industrial capex revival, bleak Hydrocarbon scenario in Indian and ME countries and looming crisis in the Power generation sector in India. Power equipment import duty hike could turn positive for the company s BTG manufacturing SBU but 13 th Plan orders will take its own time to get awarded. However, orders from Buildings and Factories will continue at its own (good) pace, setting a stage for reasonable order inflows for FY13E. Valuations and our take: A higher order intake in Infrastructure segment, which will reduce the gestation period, and thus lead to a higher revenue growth. However, will it come at a cost of lower margins is the key question? A 0-5% growth in order inflows in FY13E is more or less factored in CMP. However, the mix and timing will generate the delta in EBITDA margins for FY14E earnings. The increasing Working Capital requirement is eating away the free cash flows of the standalone entity. Over and above this, equity investments in IDPL (Rs1.5bn approx) would further put stress on the cash flows for the company. A stake sale in subsidiaries is expected as now the management has indicated some equity fund raising in IDPL which could be the trigger point in the stock. We have not touched our estimates currently. On core P/E basis, L&T is trading at 12.7xFY13E and 11.3x FY14E, which could have an upward bias if environment improves. We reiterate that in any cyclical economic improvement and with limited options available, L&T stands to benefit among its peers. Thus, we maintain our 'Accumulate on declines rating on the stock. July 23, 2012 2
Exhibit 1: Q1FY13 Result Overview (Rs m) Y/e March Q1FY13 Q1FY12 YoY gr. (%) Q4FY12 FY13E FY12 YoY gr. (%) Net Sales 119,554 94,821 26.1 184,609 639,286 531,705 20.2 Expenditure Consumption of RM 37,201 21,961 69.4 33,137 153,429 117,646 30.4 % of Net Sales 31.1 23.2 17.9 24.0 22.1 Construction, Mfg. & Others 20,891 20,230 3.3 48,246 147,036 124,778 17.8 % of Net Sales 17.5 21.3 26.1 23.0 23.5 Sub Contracting 24,905 19,069 30.6 39,207 108,679 106,475 2.1 % of Net Sales 20.8 20.1 21.2 17.0 20.0 Total Expenditure 106,514 83,687 27.3 159,001 567,191 468,879 21.0 EBIDTA 13,040 11,134 17.1 25,608 72,095 62,826 14.8 Margin (%) 10.9 11.7 (83.5) 13.9 11.3 11.8 (53.9) Depreciation 1,919 1,679 14.3 1,804 7,552 6,995 8.0 EBIT 11,121 9,455 21.2 23,804 64,543 55,832 15.6 Interest 2,284 1,573 45.2 1,211 7,400 6,661 11.1 Other Income 3,558 2,697 43.1 3,142 13,792 13,383 3.1 PBT 12,695 10,579 20.0 25,735 70,790 62,553 13.2 Tax 4,189 3,352 25.0 6,900 23,361 18,357 27.3 Tax Rate (%) 33.0 31.7 26.8 33.0 29.3 Recurring Pat(ADJ) 8,506 7,227 17.7 18,836 47,429 44,197 7.3 PAT 8,637 7,462 15.7 19,204 47,429 44,565 6.4 Exhibit 2: Order Inflow Analysis (Rs bn) 350 300 250 200 150 100 50 0 Order Inflow Order Book (RHS) 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 Q1FY10 (Rs bn) Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4Y12 Q1FY13E July 23, 2012 3
Exhibit 3: Business Snapshot (Rs bn) Order inflow has been showing some signs of revival but components are too biased towards Infrastructure, mainly Buildings and Roads segment. Nearly Rs86bn worth of orders came from IDPL pertaining to two BOT projects and one EPC of BOT project worth Rs20bn. In E&C, the export inflows dropped by 53% YoY as ME orders have not started pouring in as expected. Business Snapshots QoQ Q1FY13 Q4FY12 Q3FY12 Q2FY12 Q1FY12 Sales Engineering & Construction 104 167 124.5 97 81 Electrical & Electronics 7.6 11.4 8.4 8 7 MIP 5.7 8.1 7.2 7 7 Others 3.6 2.7 2.6 2 2 EBIT Engineering & Construction 9.88 22.6 12.8 10.3 8.1 Electrical & Electronics 0.4 1.59 0.7 0.7 0.6 MIP 0.73 1.3 1.3 1.1 1.2 Others 1 0.32 0.67 0.4 0.4 EBIT (%) Engineering & Construction 9.5 13.5 10.3 10.6 10.0 Electrical & Electronics 5.3 13.9 8.3 8.3 8.3 MIP 12.8 16.0 18.1 16.4 17.7 Others 27.8 11.9 25.8 18.2 21.2 Exhibit 4: Order Book Composition Hydro carbon 8% Process 14% Others 4% Infrastructure 47% Power 27% July 23, 2012 4
Exhibit 5: Order Book by Geography Middle East 9% Others 2% Domestic 89% Exhibit 6: Client wise Order Book Development Assets (In- House) 17% Pubilc 32% Private 51% Exhibit 7: Q1FY13 Sales Break up Others 3% MIP 4% Electrical & Electronics 6% Engineering & Construction 87% July 23, 2012 5
Analyst call highlights MTM losses booked above EBITDA line in Q1FY13 were to the extent of Rs2.7bn (Rs1.6bn relating to loans and Rs1bn relating to operational business) and higher treasury and dividends for S&A was Rs2.2bn, netting off each others. The company also booked a reversal of Rs500m write-back above EBITDA margin. The working capital needs are rising and the reason for this is support to vendor chain. In Q1FY13, it stood at 15.3% to sales. There has been an increased level of cash at EWAC Lloyd, L&T Infotech and L&T Infocity which has led to higher dividend payouts to the parent. About 500 workers have taken VRS as the manufacturing base, mainly pertaining to electrical business, has been shifted to low cost places like Vadodara, Coimbatore and Ahmadnagar. Hyderabad metro work has commenced and the concession period has also officially started. Exhibit 8: SOTP Management has maintained a 15-20% growth in order inflow, 15-20% growth in revenues and aiming to maintain EBITDA at FY12 levels. Sectors Valuation Parameter Rs / Share Value (Rs m) L&T Standalone 13x (25% higher multiple than our coverage universe P/E) FY14 EPS of Rs86.8 1,129 584,897 L&T Infotech 8.5x FY14E PAT of Rs 5.9 bn @25% HOLDCO 62 37,783 L&T Finance Holdings 25% HOLDCO Discount to Mkt Cap of LT Finance -LT share 82% 71 43,185 L & T IDPL 1.5x Equity in FY13E of Rs70bn @ HOLDCO of 25% 134 81,844 LT Power Equipment P/E 7.8x FY14E PAT of Rs2.9bn on USD 1bn sales @ HOLDCO of 25% 27 16,446 L & T Manufacturing 5x FY14E Rs3bn PAT of various facilities 25 15,485 Others 5x FY14E Rs8bn PAT of various businesses 70 42,968 Total Value 1,517 822,608 Source: PL Research July 23, 2012 6
Income Statement (Rs m) Net Revenue 434,959 531,705 639,286 739,978 Raw Material Expenses 100,640 117,646 189,285 221,424 Gross Profit 334,319 414,059 450,001 518,554 Employee Cost 28,845 9,754 39,887 45,828 Other Expenses 253,338 341,479 338,019 388,997 EBITDA 52,136 62,826 72,095 83,729 Depr. & Amortization 5,992 6,995 7,552 8,700 Net Interest 6,474 6,661 7,400 8,800 Other Income 16,511 13,383 13,937 13,424 Profit before Tax 56,181 62,553 71,080 79,653 Total Tax 19,459 18,357 23,361 26,189 Profit after Tax 36,722 44,196 47,719 53,464 Ex-Od items / Min. Int. (2) Adj. PAT 36,720 44,196 47,429 53,172 Avg. Shares O/S (m) 608.9 612.4 612.4 612.4 EPS (Rs.) 60.3 72.2 77.4 86.8 Cash Flow Abstract (Rs m) C/F from Operations 16,148 8,834 31,028 19,627 C/F from Investing (18,461) (29,069) (26,936) (18,896) C/F from Financing 5,298 20,713 (4,136) 217 Inc. / Dec. in Cash 2,985 478 (43) 947 Opening Cash 14,319 17,304 17,781 17,738 Closing Cash 17,304 17,781 17,738 18,685 FCFF 8,939 (1,225) 17,299 13,536 FCFE 12,542 26,132 29,953 33,490 Key Financial Metrics Growth Revenue (%) 18.6 22.2 20.2 15.8 EBITDA (%) 17.0 20.5 14.8 16.1 PAT (%) 16.0 20.4 7.3 12.1 EPS (%) 14.7 19.7 7.3 12.1 Profitability EBITDA Margin (%) 12.0 11.8 11.3 11.3 PAT Margin (%) 8.4 8.3 7.4 7.2 RoCE (%) 15.2 15.2 14.1 14.4 RoE (%) 18.3 18.8 17.9 18.3 Balance Sheet Net Debt : Equity 0.2 0.3 0.3 0.4 Net Wrkng Cap. (days) (767) (759) (481) (375) Valuation PER (x) 22.9 19.1 17.8 15.9 P / B (x) 3.8 3.3 3.0 2.8 EV / EBITDA (x) 17.1 14.7 13.0 11.4 EV / Sales (x) 2.1 1.7 1.5 1.3 Earnings Quality Eff. Tax Rate 34.6 29.3 33.0 33.0 Other Inc / PBT 32.0 21.4 19.4 16.7 Eff. Depr. Rate (%) 6.7 6.6 5.9 6.1 FCFE / PAT 34.2 59.1 63.2 63.0. Balance Sheet Abstract (Rs m) Shareholder's Funds 218,463 252,231 277,978 301,914 Total Debt 71,611 98,968 111,622 131,577 Other Liabilities 2,635 1,331 867 903 Total Liabilities 292,708 352,530 390,467 434,394 Net Fixed Assets 74,581 86,931 102,315 109,752 Goodwill Investments 146,848 158,719 164,569 167,627 Net Current Assets 71,279 106,975 123,528 156,973 Cash & Equivalents 17,304 17,781 17,738 18,685 Other Current Assets 332,208 416,792 470,756 509,971 Current Liabilities 278,233 327,599 364,966 371,683 Other Assets (94) 56 42 Total Assets 292,708 352,530 390,467 434,394 Quarterly Financials (Rs m) Y/e March Q2FY12 Q3FY12 Q4FY12 Q1FY13 Net Revenue 112,452 139,986 184,609 119,554 EBITDA 11,741 13,431 25,608 13,540 % of revenue 10.4 9.6 13.9 11.3 Depr. & Amortization 1,709 1,803 1,804 1,919 Net Interest 1,970 1,907 1,211 2,284 Other Income 3,632 4,487 3,142 3,558 Profit before Tax 11,694 14,208 26,285 12,895 Total Tax 3,709 4,292 7,081 4,255 Profit after Tax 7,985 9,915 19,204 8,637 Adj. PAT 7,985 9,915 18,836 8,640 Key Operating Metrics E&C (Rs m) 377,400 469,788 584,452 592,722 E&E (Rs m) 28,380 35,794 25,306 28,973 MIP (Rs m) 26,660 28,538 25,306 25,306 Others (Rs m) 6,600 9,630 4,222 18,338 Blended EBIDTA Marg. (%) 12.0 11.8 11.3 11.3 Interest as a % to sales 1.5 1.3 1.2 1.2 Order Book (Rs bn) 1,334 1,457 1,524 1,560 Other Inc. / PAT (%) 43.7 30.3 29.1 25.0 Order intake (Rs bn) 797 706 706 776 Int. Rate (%) 9.0 7.3 6.6 6.7 Capex (Rs bn) 15.8 16.2 20.7 15.7 NCA/Sales (%) 16.4 20.1 19.3 21.2 RM & Const Cost (%) 67.9 68.1 69.5 70.3. July 23, 2012 7
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 56.0% 23.3% 19.3% 1.3% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. July 23, 2012 8