Result Update Larsen & Toubro Accumulate Q1 was an inline quarter adjusting for IndAS changes and one-off gains. It has held on to its FY19 guidance given at the beginning of the year, making Q1 a non-event in a way. Remains the best proxy for the Indian infrastructure story. Maintain Accumulate with a TP ` 1574 Holds on FY19 guidance: Good inflows in Q1FY19 L&T has maintained a positive outlook FY19, with order inflow guidance of 1-11%, revenue growth of 12-15% accompanied by a 25bps EBIDTA margin improvement. This comes on the back of a decent Q1 with order inflows of ` 36bn, a growth of 37%YoY. While a higher order inflow would have been normal in a pre-election year, the management stated that there would no major front ending but there will be relatively less skew between H2 and H1. Consolidated order book of ` 2.71tn provides strong mediumterm visibility. Q1FY19 inline quarter adjusting for one-offs and IndAS changes Revenues were strong in Q1 with a 18% YoY growth. EBIDTA of ` 29bn in Q1 carries the impact of a one-off gain of ` 3.5bn on account of sale of remaining stake in Kattupalli port and a onetime provision of ` 4.8bn for a sub-judice real estate project. On track with its strategic RoE expansion plan It plans to expand RoE to 18% in FY21, from the current levels of ~13-1. It is working on multiple drivers simultaneously-loss reduction of subsidiaries by sell offs and divestiture, monetizing assets identified as noncore, shifting of plants from prime locations and monetise the real estate, focus on working capital to achieve incremental savings, use of digital and analytics to improve internal productivity etc. Best proxy for the Indian infrastructure story RoE expansion through a combination of balance sheet de-leveraging, incremental operating margin gains, focus on an asset light pure play EPC model should sustain valuations for Larsen. We make cursory changes to our numbers and adjust TP for these and changes subsidiary market caps Accumulate with a TP of ` 1,574. Q1FY18 Result (` Mn) Particulars Q1FY19 Q1FY18 YoY (%) Q4FY18 QoQ (%) Operating Income 282,835 239,898 17.9 46,781 (3.5) Operating Expenditure 172,76 151,447 14. 269,446 (35.9) Staff Expenses 42,815 35,36 21.3 41,284 3.7 Other Expenditure 21,631 18,452 17.2 26,379 (18.) EBITDA 29,133 2,752 4.4 53,95 (46.) Other Income 2,44 3,657 (33.3) 4,328 (43.6) Depreciation 6,449 5,513 17. 4,924 31. Interest 3,648 2,958.1 4,181 (12.8) PBT 21,477 15,253 4.8 49,128 (56.3) Tax 9,346 4,597 13.3 14,58 (35.9) Net Profit 1,798 8,925 21. 31,645 (65.9) bps bps Operating Exp. (%) 61.1 63.1 (27) 66.2 (518) Staff Cost (%) 15.1 14.7 42 1.1 499 Other Expenditure (%) 7.6 7.7 (4) 6.5 116 EBITDA (%) 1.3 8.7 165 13.3 (295) PBT (%) 7.6 6.4 124 12.1 (448) NPM (%) 3.8 3.7 1 7.8 (397) July 26, 218 CMP ` 1,32 Target / Upside ` 1,574/ 19% BSE Sensex 36,858 NSE Nifty 11,132 Scrip Details Equity / FV ` 2,81mn/ 2/- Market Cap ` 1,85bn USD 27bn 52-week High/Low `147/1115 Avg. Volume (no) 2,277,121 NSE Symbol Bloomberg Code Shareholding Pattern Jun 18 (%) LT LT IN Promoters - MF/Banks/FIs 38.3 FIIs 18.3 Public / Others 41.4 Valuation (x) FY18 FY19E FY2E P/E 25.1 22.8 19.6 EV/EBITDA 21. 19.9 18.1 ROE 13.9 14. 15.1 ROCE 8. 8. 8.5 Estimates (` Bn) FY18 FY19E FY2E Net Sales 1,198 1,354 1,517 EBITDA 136 144 161 PAT 74 81 94 EPS (`) 52 58 67 Sr. Analyst: Vinod Chari Tel: +9122 496 9776 E-mail: vinodc@dolatcapital.com Analyst: Jayakanth Kasthuri Tel: +9122 496 9771 E-mail: jayakanthk@dolatcapital.com
SOTP Valuation Target Price ` 1574 Earnings/ Book Value Target P/E, P/B Value Valuation Type L&T Stake Value Per share value (` mn) (X) (` mn) (%) (` mn) (`) Core E&C business (FY2E) 71,68 23 1,646,987 PER 1. 1,646,987 1,175 L&T Infotech 311,67 233,3 25% disc to current Mcap 84. 196,42 14 L&T Tech. services 146,892 11,169 25% disc to current Mcap 88.8 97,841 7 L&T Finance Holdings 367,319 293,855 3% disc to current Mcap 64.1 188,479 134 LT IDPL 46,993 1. 46,993 PBV 97.5 45,794 33 LT Power 31,127 1. 31,127 PBV 1. 31,127 22 1,574 4 35 3 25 2 15 1 5 Order Inflow Mix for Q1FY19 (in ` bn) Q1FY19 Domestic International Q1FY18 Segment-wise Order Inflow Q1FY19 (%) Services 22% Others 3% Hydrocarbon 13% HE+ Defence E&A Infra 5 July 26, 218 2
Segment-wise Order Book Q1FY19 (%) E&A 1% HE+Defence Engg 6% Hydrocarbon 1% Power 3% Others 2% Infra 78% Q1FY19 Revenue Break Up (%) Others 7% Services 27% Infra 42% Hydrocarbon 12% E&A Defence Engg 3% HE 1% Power 3, Order Book as of Jun 18 (in ` bn) 2,5 2, 1,5 1, 5 Q1FY19 International Domestic Q1FY18 July 26, 218 3
Revenue & Revenue growth YoY 1,6 1,4 1,2 1, 8 6 4 2 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY2E Revenue (` bn) YoY Growth - RHS (%) 3% 25% 2% 15% 1% 5% % -5% EBITDA & EBITDA Growth YoY 18 16 14 12 1 8 6 4 2 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY2E 25% 2% 15% 1% 5% % -5% -1% -15% -2% EBITDA (` bn) YoY Growth - RHS (%) EBITDA Margin - RHS (%) Net profit & Net profit growth YoY 1 9 8 7 6 5 4 3 2 1 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY2E Net Profit (` bn) YoY Growth - RHS % NP Margin - RHS (%) 7. 6. 5. 4. 3. 2. 1.. -1. July 26, 218 4
Income Statement (` mn) Particulars Mar17 Mar18P Mar19E Mar2E Net Sales 1,1,11 1,198,621 1,354,442 1,516,975 Total Expenditure 988,82 1,62,9 1,21,166 1,355,387 Operating Expenses 719,785 771,6 88,387 986,34 Employee Expenses 138,54 152,924 172,84 193,541 Selling & Adm. Expenses 13,477 138,916 156,975 175,812 Other Income 13,441 14,11 14,816 15,556 EBIDTA (Excl. OI) 111,38 135,721 144,275 161,587 EBIDTA (Incl. OI) 124,749 149,831 159,91 177,144 Interest 13,398 15,385 16,677 17,511 Depreciation 23,699 19,287 21,49 21,481 Profit Before Tax 88,866 116,312 126,353 146,739 Tax 2,66 31,989 41,696 48,424 Minority Interest 8,395 (1,74) (3,668) (3,937) Net Profit 6,44 73,75 8,989 94,378 Balance Sheet (` mn) Particulars Mar17 Mar18P Mar19E Mar2E Sources of Funds Equity Capital 1,866 2,83 2,83 2,83 Other Reserves 5,299 553,767 597,832 649,183 Net Worth 52,165 556,57 6,635 651,985 Secured Loans 682,654 738,62 775,532 814,39 Unsecured Loans 266,357 346,93 363,398 381,568 Loan Funds 949,11 1,84,695 1,138,93 1,195,877 Deferred Tax Liability (11,252) (14,941) (14,941) (14,941) Total Capital Employed 1,439,924 1,626,325 1,724,625 1,832,922 Applications of Funds Gross Block 171,78 228,877 233,877 238,677 Less: Accumulated Dep. 39,46 58,693 61,627 64,79 Net Block 132,374 17,184 172,249 173,968 Capital Work in Progress 149,665 134,434 145,434 156,434 Investments 114,953 128,43 153,567 159,71 Current Assets, Loans & Advances Inventories 41,397 48,478 54,92 61,51 Sundry Debtors 286,89 346,541 315,418 353,268 Cash and Bank Balance 53,6 8,325 113,626 121,45 Loans and Advances 43,4 312,23 296,864 332,488 Other Current Assets 39,568 465,248 525,731 588,818 sub total 1,21,919 1,252,616 1,36,558 1,457,489 Less: Current Liabilities & Provisions Current Liabilities 62,439 721,82 742,16 831,219 Provisions 26,678 24,838 28,66 31,434 sub total 629,118 746,639 77,226 862,653 Net Current Assets 572,81 55,977 536,332 594,835 Total Assets 1,439,924 1,626,325 1,724,625 1,832,922 E Estimates Cash Flow (` mn) Particulars Mar17 Mar18P Mar19E Mar2E Profit before tax 87,651 115,159 121,365 138,152 Depreciation & w.o. 23,699 19,287 21,49 21,481 Net Interest Exp 13,398 15,385 16,677 17,511 Direct taxes paid (2,66) (31,989) (41,696) (48,424) Change in Working Capital (155,45) 94,9 2,945 (5,725) (A) CF from Opt. Activities (5,722) 211,933 12,34 77,995 Capex (2,85) (41,866) (16,) (15,8) Free Cash Flow (52,87) 17,67 14,34 62,195 (B) CF from Invt. Activities (81,189) (55,343) (41,137) (15,8) Inc./(Dec.) in Debt 61,996 135,684 54,235 56,947 Interest exp net (13,398) (15,385) (16,677) (17,511) Dividend Paid (Incl. Tax) (15,67) (26,91) (36,923) (43,28) (C) CF from Financing 32,93 94,335 634 (3,592) Net Change in Cash (84) 27,266 33,3 7,779 Opening Cash balances 53,899 53,6 8,325 113,626 Closing Cash balances 53,6 8,325 113,626 121,45 Important Ratios Particulars Mar17 Mar18P Mar19E Mar2E (A) Measures of Performance (%) EBIDTA Marg (excl. OI) 1.1 11.3 1.7 1.7 Interest / Sales 1.2 1.3 1.2 1.2 Tax/PBT 22.6 27.5 33. 33. Net Profit Margin 5.5 6.1 6. 6.2 (B) As Percentage of Net Sales Operating Expenses 65.4 64.3 65. 65. Employee Expense 12.6 12.8 12.8 12.8 Other Expenses 11.9 11.6 11.6 11.6 (C) Measures of Financial Status Debt / Equity (x) 1.9 1.9 1.9 1.8 Interest Coverage (x) 9.3 9.7 9.5 1.1 Avg. Cost of Debt (%) 1.5 1.5 1.5 1.5 Debtors Period (days) 95 16 85 85 Invt. Turn. Ratio (x) 27 25 25 25 Fixed Assets Turn. (x) 6.4 5.2 5.8 6.4 WC Turnover (x) 1.9 2.4 2.5 2.6 Non-Cash WC (` Mn) 519,742 425,651 422,76 473,431 (D) Measures of Investment EPS (`) (excl EO) 43.1 52.6 57.8 67.3 CEPS (`) 9.1 66.4 72.8 82.7 DPS (`) 9.3 16. 22. 25.6 Dividend Payout (%) 21.6 3.4 38. 38. Profit Ploughback (%) 78.4 69.6 62. 62. Book Value (`) 538.3 397.2 428.6 465.3 RoANW (%) 12.8 13.9 14. 15.1 RoACE (%) 7. 8. 8. 8.5 RoAIC (%) 7.6 8.9 8.7 9.4 (E) Valuation Ratios CMP (`) 1,32 1,32 1,32 1,32 P/E (x) 3.6 25.1 22.8 19.6 Market Cap. (` Mn) 1,231,541 1,849,852 1,849,852 1,849,852 MCap/ Sales (x) 1.1 1.5 1.4 1.2 EV (` Mn) 2,127,492 2,854,222 2,875,157 2,924,324 EV/Sales (x) 1.9 2.4 2.1 1.9 EV/EBDITA (x) 19.1 21. 19.9 18.1 P/BV (x) 2.5 3.3 3.1 2.8 FCFF Yield (%) (.3) 15.7 7.7 5.5 Dividend Yield (%).7 1.2 1.7 1.9 E Estimates July 26, 218 5
DART RATING MATRIX Total Return Expectation (12 Months) Buy > 2% Accumulate 1 to 2% Reduce to 1% Sell < % Rating and Target Price History 18 Month Rating TP (`) Price (`)* 17 16 Feb-18 Accumulate 1,71 1,456 May-18 Accumulate 1,611 1,359 15 14 13 * As on Recommendation Date 12 11 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 L&T Target DART Team Purvag Shah Managing Director purvag@dolatcapital.com +9122 496 9747 Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 496 9745 CONTACT DETAILS Equity Sales Designation E-mail Direct Lines Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 496 979 Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com +9122 496 9762 Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 496 9735 Kartik Mehta Asia Head Derivatives kartikm@dolatcapital.com +9122 496 9715 Derivatives Strategist Designation E-mail Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 496 975 Equity Trading Designation E-mail P. Sridhar VP and Head of Sales Trading sridhar@dolatcapital.com +9122 496 9728 Chandrakant Ware AVP - Equity Sales Trading chandrakant@dolatcapital.com +9122 496 977 Derivatives Trading Designation E-mail Shirish Thakkar AVP - Derivatives shirisht@dolatcapital.com +9122 496 972 Hardik Mehta Sales Trader hardikm@dolatcapital.com +9122 496 9748 Dolat Capital Market Private Limited. 2, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 4 1
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