Larsen & Toubro (LT IN) In line results; current orders momentum is a positive

INSTITUTIONAL EQUITY RESEARCH Larsen & Toubro (LT IN) In line results; current orders momentum is a positive INDIA CAPITAL GOODS Quarterly Update Top takeaways from 4QFY18 Recurring PAT (Rs 31.8bn, flat yoy) was in line with our and consensus estimates as both revenues and EBITDA was on expected lines. Reported order inflows (Rs 496bn) grew 5% yoy. Importantly, ex services order inflows (Rs 420bn) grew by 2% yoy as domestic orders (85% of total) grew 5% while international orders declined 13% yoy. Working capital intensity increased modestly to 19.2% (vs. 18.6% yoy) of sales as L&T focused more on execution in FY18. Key highlights: Revenues at Rs 400bn (+9% yoy) were aided by domestic sales (+12% yoy) while growth in international revenues was subdued at 3% yoy. Execution in the infrastructure segment (58% of sales) was strong at 14% as headwinds impacting domestic projects abated, allowing a 25% yoy growth in domestic infrastructure sales. Other segments that supported revenues were heavy engineering (+14% yoy) driven by defence projects, Hydrocarbon (+38%) as revenue recognition on major Middle East projects kicked in, Financial Services (+23%), IT services (24%), and Developmental projects (21%) on part commissioning of the Hyderabad metro. Power ( 18% yoy) and E&A ( 2% yoy) were drags. EBITDA at Rs 51.3bn (+17% yoy) was in line with estimates as EBITDA margins at 12.8% expanded 80bps yoy. Turnaround in Financial Services essentially drove margins. Depreciation charge declined 32% yoy despite commissioning of the Hyderabad Metro. Interest expenses rose 40% yoy due to higher working capital debt and the Hyderabad Metro. Adjustments we have considered to arrive at recurring earnings in 4Q include Rs 4.7bn of real estate monetisation, Rs 2bn provision for Nabha power receivables, and Rs 1.5bn higher tax impact on levy of provisions related to Section 14A. Analyst meet takeaways L&T wrote off Rs 160bn of slow moving orders (6% of order book) from its order backlog. In Q2 and Q3 FY18, it removed Rs 138bn of projects from its orderbook. For FY19, it guided for 10 12% yoy in new orders, 12 15% revenue growth and +25bps Ex services EBITDA margin expansion. L&T s FY19 order inflow guidance expects 70% of its orders from the domestic market driven by government agencies (both State and Centre) and includes the impact of a potential slowdown in ordering in 4QFY19 due to general elections. It announced Rs 240bn of new orders in the last fortnight, already achieving 14% of its targeted order inflows for FY19. Outlook and valuation: L&T expects to achieve its strategic target of 18% ROE by FY21 (13.7% FY18) with volume growth in its core EPC business coupled with margin expansion and higher capacity utilization in its currently loss making ventures (particularly in ship building and forging). We do not doubt its ability to grow its revenues even beyond its estimate of 15% in the next two years, mainly because of its robust orderbook. However, we feel less confident on its ability to materially improve its margins in the core business from here because of continued competitive headwinds even in large complex projects, which were largely L&T s domain until now. 29 May 2018 Neutral (Maintain) CMP RS 1376/ TARGET RS 1390 (+1%) COMPANY DATA O/S SHARES (MN) : 1401 MARKET CAP (RSBN) : 1883 MARKET CAP (USDBN) : 27.8 52 WK HI/LO (RS) : 1470 / 1108 LIQUIDITY 3M (USDMN) : 40.9 PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % Mar 18 Dec 17 Sep 17 FII / NRI : 19.0 17.1 17.4 FI / MF : 39.1 40.7 40.1 NON PRO : 16.0 16.0 15.9 PUBLIC & OTHERS : 25.9 26.2 26.6 KEY FINANCIALS Rs bn FY18 FY19E FY20E Net Sales 1,190.3 1,366.8 1,575.5 EBIDTA 133.1 156.6 179.0 Net Profit 72.6 83.9 95.3 EPS, Rs 51.8 59.8 67.7 PER, x 26.6 23.0 20.3 EV/EBIDTA, x 22.0 19.2 17.1 PBV, x 3.5 3.1 2.8 ROE, % 13.7 14.3 14.6 Debt/Equity (%) 193.2 188.0 179.9 CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E Revenue 1,366.8 1,575.5 1% 1% EBITDA 156.6 179.0 1% 0% Core PAT 83.9 95.3 2% 2% EPS (Rs) 59.8 67.7 2% 2% Jonas Bhutta (+ 9122 6246 4119) jbhutta@phillipcapital.in Vikram Rawat (+ 9122 6246 4120) vrawat@phillipcapital.in We maintain our Neutral rating with largely unchanged estimates and an SOTP based target of Rs 1,390 as L&T trades at 20x FY20 for 15% earnings CAGR (FY18 20). (Rs mn) Q4FY18 Q4FY17 Change yoy vs. expect. Comments Order inflows 495,570 472,890 5% 1% Driven by robust domestic orders in infrastructure segments Sales 400,281 366,187 9% 1% Supported by growth across all segments except Power and E&A EBITDA 51,315 43,824 17% 3% EBITDA margin (%) 12.8% 12.0% 85 bps 51 bps Led by turnaround in Financial Services segment Recurring PAT 31,772 32,101 1% 1% Page 1 PHILLIPCAPITAL INDIA RESEARCH

Consolidated results L&T consolidated quarterly results Rs Mn Q4FY18 Q4FY17 Change yoy Order inflows 495,570 472,890 5% Domestic 408,790 382,450 7% International 86,780 90,440 4% Order book 2,631,070 2,613,410 1% Domestic 2,006,070 1,915,410 5% International 625,000 698,000 10% Net Sales 400,281 366,187 9% Domestic 281,891 251,077 12% International 118,390 115,110 3% Gross Profit 116,818 102,383 14% Gross margin (%) 29.2% 28.0% 122 bps Employee costs (41,284) (35,014) 18% Other expenses (24,219) (23,545) 3% EBITDA 51,315 43,824 17% EBITDA margins (%) 12.8% 12.0% 85 bps Depreciation (4,924) (7,227) 32% EBIT 46,391 36,597 27% Interest (4,181) (2,958) 41% Other Income 4,328 3,513 23% PBT 46,538 37,152 25% Tax (11,892) (5,747) 107% Effective tax rate (%) 26% 15% 1009 bps PAT pre Minority 34,645 31,405 10% PAT margin (%) 8.7% 8.6% 8 bps Less: Minority Interest (1,705) (139) 1130% Add: Profits of Associates (1,168) 834 240% Recurring PAT 31,772 32,101 1% Exceptional (98) (1,855) 95% Reported PAT 31,675 30,246 5% Recurring EPS (Rs) 22.7 22.9 1% Group segment wise order inflows Y/E Mar, Rs mn Q4FY18 Q4FY17 Change yoy Infrastructure 334,550 263,020 27% Power 1,820 2,370 23% Heavy Engineering 20,970 54,630 62% Hydrocarbon 29,760 72,760 59% E&A 15,290 18,916 19% Others 23,052 4,234 444% Order Inflows ex services 425,443 415,930 2% Domestic ex services 366,939 348,971 5% International ex services 58,503 66,959 13% Services 70,127 56,960 23% Domestic Services 41,851 33,479 25% International Services 28,277 23,481 20% Order Inflows total 495,570 472,890 5% Domestic 408,790 382,450 7% International 86,780 90,440 4% Group segment wise order book Y/E Mar, Rs mn Q4FY18 Q4FY17 Change yoy Infrastructure 1,954,190 1,937,960 1% Power 95,370 138,240 31% Heavy Engineering 135,230 119,970 13% Hydrocarbon 265,900 248,230 7% E&A 31,573 26,134 21% Others 148,807 142,876 4% Total Order book 2,631,070 2,613,410 1% Page 2 PHILLIPCAPITAL INDIA RESEARCH

L&T Consolidated segment revenue Rs Mn Q4FY18 Q4FY17 Change yoy Infrastructure 231,360 203,010 14% Power 15,068 18,386 18% Heavy Engineering 11,835 10,347 14% Hydrocarbon 35,591 25,797 38% E&A 16,431 16,786 2% IT&TS 31,524 25,486 24% Financial Services 27,221 22,065 23% Development Projects 12,170 10,065 21% Others 25,016 44,173 43% Segment gross revenue 406,213 376,115 8% Less: Intersegment (5,932) (7,835) 24% Less: Excise duty (2,093) 100% Net revenue 400,281 366,187 9% L&T Consolidated segment EBIT Y/E Mar, Rs mn Q4FY18 Q4FY17 Change yoy Infrastructure 29,453 25,191 17% Power 520 589 12% Heavy Engineering 1,739 2,254 23% Hydrocarbon 1,791 2,080 14% E&A 2,655 2,404 10% IT&TS 5,658 4,554 24% Financial Services 4,087 (528) 874% Development Projects 167 (627) 127% Others 3,393 7,992 58% Segment EBIT 49,463 43,909 13% Less: Intersegment margins (90) (182) 51% Add: Un allocable income, net (2,982) (7,130) 58% EBIT 46,391 36,597 27% EBIT margin (%) Infrastructure 12.7% 12.4% 32 bps Power 3.5% 3.2% 25 bps Heavy Engineering 14.7% 21.8% 709 bps Hydrocarbon 5.0% 8.1% 303 bps E&A 16.2% 14.3% 184 bps IT&TS 17.9% 17.9% 8 bps Financial Services 15.0% 2.4% 1741 bps Development Projects 1.4% 6.2% 760 bps Others 13.6% 18.1% 453 bps Segment EBIT 12.2% 11.7% 50 bps Page 3 PHILLIPCAPITAL INDIA RESEARCH

Standalone Results L&T Standalone quarterly results Rs Mn Q4FY18 Q4FY17 Change yoy Net Sales 269,417 233,236 16% Gross Profit 60,222 52,123 16% Gross margin (%) 22.4% 22.3% 0 bps Employee costs (14,751) (13,650) 8% Other expenses (10,876) (7,789) 40% EBITDA 34,595 30,684 13% EBITDA margins (%) 12.8% 13.2% 31 bps Depreciation (2,665) (3,963) 33% EBIT 31,930 26,721 19% Interest (3,736) (2,684) 39% Other Income 3,746 2,972 26% PBT 31,940 27,009 18% Tax (7,976) (4,857) 64% Effective tax rate (%) 25.0% 18.0% 699 bps Recurring PAT 23,964 22,152 8% Exceptional 488 (9,611) 105% Reported PAT 24,452 12,541 95% L&T Standalone segment revenue Rs Mn Q4FY18 Q4FY17 Change yoy Infrastructure 211,869 176,055 20% Power 15,068 18,386 18% Heavy Engineering 11,527 10,200 13% E&A 13,395 13,557 1% Others 20,091 21,414 6% Segment gross revenue 271,950 239,611 13% Less: Intersegment (2,533) (4,614) 45% Less: Excise duty (1,760) 100% Net revenue 269,417 233,236 16% L&T Standalone segment EBIT Y/E Mar, Rs mn Q4FY18 Q4FY17 Change yoy Infrastructure 26,811 21,611 24% Power 520 589 12% Heavy Engineering 1,835 2,376 23% E&A 2,253 1,871 20% Others 1,820 2,504 27% Segment EBIT 33,239 28,950 15% Less: Intersegment margins (91) (180) 49% Add: Un allocable income, net (1,217) (2,049) 41% EBIT 31,930 26,721 19% EBIT margin (%) Infrastructure 12.7% 12.3% 38 bps Power 3.5% 3.2% 25 bps Heavy Engineering 15.9% 23.3% 737 bps E&A 16.8% 13.8% 302 bps Others 9.1% 11.7% 263 bps Segment EBIT 12.2% 12.1% 14 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 1,366.8 1,575.5 Growth, % 8 9 15 15 Total income 1,093.1 1,190.3 1,366.8 1,575.5 Raw material expenses 773.4 829.5 939.7 1,080.6 Employee expenses 138.5 152.9 177.5 199.8 Other Operating expenses 69.9 74.8 93.1 116.2 EBITDA (Core) 111.3 133.1 156.6 179.0 Growth, % 6.4 19.6 17.6 14.3 Margin, % 10.2 11.2 11.5 11.4 Depreciation 23.7 19.3 24.7 29.8 EBIT 87.6 113.8 131.9 149.2 Growth, % 1.0 29.9 15.9 13.1 Margin, % 8.0 9.6 9.6 9.5 Interest paid 13.4 15.4 16.4 17.5 Other Non Operating Income 13.4 14.1 13.7 13.7 Pre tax profit 87.7 112.6 129.2 145.4 Tax provided 21.5 29.3 33.7 37.9 Profit after tax 66.2 83.3 95.4 107.5 Others (Minorities, Associates) 7.0 10.7 11.5 12.3 Net Profit 59.2 72.6 83.9 95.3 Growth, % 43.0 22.6 15.6 13.6 Net Profit (adjusted) 59.2 72.6 83.9 95.3 Unadj. shares (m) 1,399 1,401 1,404 1,407 Wtd avg shares (m) 1,399 1,401 1,404 1,407 Balance Sheet Y/E Mar, Rs bn FY17 FY18 FY19e FY20e Cash & bank 53.1 80.3 90.0 105.0 Debtors 286.9 346.5 379.0 428.7 Inventory 41.4 48.5 56.3 65.1 Loans & advances 720.6 882.6 970.9 1,068.0 Other current assets 505.2 597.9 670.0 764.6 Total current assets 1,607.2 1,955.9 2,166.3 2,431.3 Investments 197.5 153.1 153.1 153.1 Gross fixed assets 204.0 244.0 306.0 361.0 Less: Depreciation 38.9 58.2 82.9 112.7 Add: Capital WIP 134.7 134.4 124.4 94.4 Net fixed assets 299.8 320.2 347.5 342.7 Total assets 2,104.5 2,429.2 2,666.9 2,927.2 Current liabilities 604.0 718.5 794.5 893.2 Provisions 34.3 37.5 43.6 50.3 Total current liabilities 638.4 756.1 838.1 943.5 Non current liabilities 928.3 1,060.3 1,147.0 1,223.3 Total liabilities 1,566.7 1,816.4 1,985.1 2,166.8 Paid up capital 1.9 2.8 2.8 2.8 Reserves & surplus 500.3 553.8 615.3 685.3 Shareholders equity 537.8 612.8 681.8 760.3 Total equity & liabilities 2,104.5 2,429.2 2,666.9 2,927.2 Cash Flow Y/E Mar, Rs bn FY17 FY18 FY19e FY20e Pre tax profit 87.7 112.6 129.2 145.4 Depreciation 23.7 19.3 24.7 29.8 Chg in working capital 31.1 203.7 118.7 144.6 Total tax paid 25.4 33.0 33.7 37.9 Cash flow from operating activities 62.3 103.6 4.1 3.5 Capital expenditure 28.1 39.8 52.0 25.0 Chg in investments 86.7 44.4 0.0 0.0 Cash flow from investing activities 97.4 19.9 38.3 11.3 Free cash flow 35.1 83.7 34.2 14.8 Equity raised/(repaid) 60.4 54.4 61.5 70.0 Debt raised/(repaid) 58.2 135.7 86.7 76.3 Dividend (incl. tax) 22.8 21.9 24.7 28.9 Other financing activities 60.4 67.2 75.6 83.8 Cash flow from financing activities 35.1 110.9 43.9 29.8 Net chg in cash 0.0 27.3 9.7 15.0 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 42.3 51.8 59.8 67.7 Growth, % 42.8 22.4 15.4 13.4 Book NAV/share (INR) 358.8 397.2 440.2 489.2 FDEPS (INR) 42.3 51.8 59.8 67.7 CEPS (INR) 59.2 65.5 77.4 88.9 CFPS (INR) 29.6 (84.9) (8.7) (14.9) DPS (INR) 14.0 13.5 15.1 17.6 Return ratios Return on assets (%) 3.8 4.2 4.2 4.3 Return on equity (%) 12.5 13.7 14.3 14.6 Return on capital employed (%) 5.4 6.0 6.1 6.3 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 317.2 354.8 342.3 332.0 Liquidity ratios Current ratio (x) 2.7 2.7 2.7 2.7 Quick ratio (x) 2.6 2.7 2.7 2.6 Interest cover (x) 6.5 7.4 8.0 8.5 Dividend cover (x) 3.0 3.8 4.0 3.9 Total debt/equity (%) 187.1 193.2 188.0 179.9 Net debt/equity (%) 176.5 178.8 173.4 164.7 Valuation PER (x) 32.5 26.6 23.0 20.3 PEG (x) y o y growth 0.8 1.2 1.5 1.5 Price/Book (x) 3.8 3.5 3.1 2.8 Yield (%) 1.0 1.0 1.1 1.3 EV/Net sales (x) 2.6 2.5 2.2 1.9 EV/EBITDA (x) 25.3 22.0 19.2 17.1 Estimates Page 5 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 1700 1500 N (TP 1390) 1300 1100 B (TP 1820) N (TP 1280) N (TP 1750) N (TP 1220) 900 B (TP 1662) N (TP N 1420) (TP N 1420) (TP 1400) N (TP 1565) N (TP 1400) 700 N (TP 1220) 500 M 15 J 15 A 15 S 15 N 15 D 15 F 16 M 16M 16 J 16 A 16 S 16 N 16 D 16 J 17 M 17M 17 J 17 J 17 S 17 O 17 D 17 J 18 M 18A 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

RESEARCH Automobiles Dhawal Doshi Nitesh Sharma, CFA Agro Chemicals Varun Vijayan Banking, NBFCs Manish Agarwalla Pradeep Agrawal, Sujal Kumar Consumer Naveen Kulkarni, CFA, FRM Preeyam Tolia, Vishal Gutka Cement Vaibhav Agarwal Engineering, Capital Goods Jonas Bhutta Vikram Rawat Economics Anjali Verma Raag Haria IT Services Vibhor Singhal Shyamal Dhruve Infrastructure Vibhor Singhal Logistics, Transportation & Midcap Vikram Suryavanshi Media Naveen Kulkarni, CFA, FRM Vishal Gutka Metals Dhawal Doshi Vipul Agrawal Midcaps Deepak Agarwal Akshay Mokashe MANAGEMENT Vineet Bhatnagar (Managing Director) Kinshuk Bharti Tiwari (Head Institutional Equity) Jignesh Shah (Head Equity Derivatives) Pharma & Specialty Chem Surya Patra Mehul Sheth, Rishita Raja Retail & Real Estate Vishal Gutka Dhaval Somaiya Strategy Naveen Kulkarni, CFA, FRM Neeraj Chadawar Telecom Naveen Kulkarni, CFA, FRM Technicals Subodh Gupta, CMT Production Manager Ganesh Deorukhkar Editor Roshan Sony Sr. Manager Equities Support Rosie Ferns SALES & DISTRIBUTION Kishor Binwal Ashvin Patil Bhavin Shah Ashka Gulati Archan Vyas Asia Sales Dhawal Shah Sales Trader Dilesh Doshi Suniil Pandit Execution Mayur Shah CORPORATE COMMUNICATIONS Zarine Damania REGIONAL MEMBER COMPANIES INDIA PhillipCapital (India) Private Limited www.phillipcapital.in SINGAPORE Phillip Securities Pte Ltd www.phillip.com.sg JAPAN Phillip Securities Japan, Ltd www.phillip.co.jp THAILAND Phillip Securities (Thailand) Public Co. Ltd. www.phillip.co.th UNITED STATES Phillip Futures Inc. MALAYSIA Phillip Capital Management Sdn Bhd www.poems.com.my INDONESIA PT Phillip Securities Indonesia www.phillip.co.id FRANCE King & Shaxson Capital Ltd. www.kingandshaxson.com AUSTRALIA PhillipCapital Australia www.phillipcapital.com.au HONG KONG Phillip Securities (HK) Ltd www.phillip.com.hk CHINA Phillip Financial Advisory (Shanghai) Co. Ltd. www.phillip.com.cn UNITED KINGDOM King & Shaxson Ltd. www.kingandshaxson.com SRI LANKA Asha Phillip Securities Limited www.ashaphillip.net/home.htm Page 7 PHILLIPCAPITAL INDIA RESEARCH

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