(LT IN) Rating: BUY CMP: Rs1,321 TP: Rs1,566 July 25, 2018 Company Report Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY BUY Target Price 1,566 1,566 Sales (Rs. m) 13,52,420 15,14,710 13,52,420 15,14,710 % Chng. - - EBITDA (Rs. m) 1,55,554 1,77,014 1,55,554 1,77,014 % Chng. - - EPS (Rs.) 58.1 66.7 58.1 66.7 % Chng. - - Key Financials FY17 FY18 FY19E FY20E Sales (Rs. bn) 1,093 1,197 1,352 1,515 EBITDA (Rs. bn) 111 136 156 177 Margin (%) 10.2 11.3 11.5 11.7 PAT (Rs. bn) 59 72 81 94 EPS (Rs.) 63.5 51.7 58.1 66.7 Gr. (%) 24.1 (18.5) 12.4 14.9 DPS (Rs.) 21.0 16.0 22.0 22.0 Yield (%) 1.6 1.2 1.7 1.7 RoE (%) 12.5 13.7 14.0 14.6 RoCE (%) 6.3 7.6 8.0 8.6 EV/Sales (x) 1.8 2.3 2.1 1.9 EV/EBITDA (x) 17.8 20.3 18.1 16.4 PE (x) 20.8 25.5 22.7 19.8 P/BV (x) 2.5 3.3 3.0 2.8 Key Data LART.BO LT IN 52-W High / Low Rs.1,470 / Rs.1,113 Sensex / Nifty 36,858 / 11,132 Market Cap Rs.1,851bn/ $ 26,935m Shares Outstanding 1,401m 3M Avg. Daily Value Rs.5652.28m Shareholding Pattern (%) Promoter s - Foreign 18.67 Domestic Institution 38.88 Public & Others 42.45 Promoter Pledge (Rs bn) - Stock Performance (%) 1M 6M 12M Absolute 4.1 (6.8) 12.8 Relative 0.2 (8.8) (1.4) Kunal Sheth kunalsheth@plindia.com 91-22-66322257 Shreyans Jain shreyansjain@plindia.com 91-22-66322256 Good start to the year! Key points Strong sales led by infrastructure (9% YoY), hydro carbon (up 37% YoY) and services business (30%+ YoY). Strong domestic inflows (up 44% YoY) lead to overall order inflow up 37% YoY. NWC at 20% of sales (19.2% for FY18). FY19 guidance maintained. L&T delivered good set of numbers in 1QFY19 with PAT at Rs12.1bn up 14% YoY ahead of ours as well as street estimates. Beat was led by surprise on both, better execution and margins. Revenues were up 18.8% YoY led by growth in Infrastructure, Hydrocarbon and Services businesses. Good performance in service business and lumpy real estate sales led to better margins. The overall order inflow for the quarter was up 37% YoY with domestic order inflow up 44.6% YoY. The working capital cycle continues to be elevated at 20% of sales (19.2% for FY18). The Company maintained guidance for 12-15% sales growth and 10-11% order inflow growth for FY19. L&T commented that tendering activity is strong in domestic market and improving in International markets. The company continues to focus on its strategic plan of achieving profitable growth and improving RoE in medium term. We Maintain BUY on L&T given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance sheet with revised TP of Rs1566. Strong margins performance: L&T reported consolidated sales of Rs282bn (PLeRs260.2bn), up 18.8% YoY. Domestic sales were up 17.5% YoY and International sales were up 18% YoY. While E&C business was up 5% YoY, Services businesses were up (IT&Ts and Financial services) ~30% YoY. Hydrocarbon business showed strong growth of ~37% YoY. EBITDA for the quarter was up 41.6% YoY to Rs29.1bn, contributed by Services and real estate business. EBITDA margins stood at 10.3%, up 170bps YoY (PLe9.1%). PAT was up by 14% YoY to Rs12.1bn (PLe9.8bn) led by strong sales and margin beat. Q1FY19 had several one offs 1) Profit on sales of Katupalli port (Rs 3.5bn) 2) Provision made for disputed real estate projects (Advance Rs4.5bn and WIP Rs2.5bn). 3) Additional sales in real estate segment due to accounting changes 4) Deprecation higher by Rs1bn due to provisions related to 2 hydro projects. Adjusted for the above, the EBITDA margin would have be similar to reported margins (one off largely getting negated) Order inflow up ~37% YoY: Order flow for the quarter was up ~37% YoY to Rs361bn and order book stood at Rs2.7tn, up 3.5% YoY. The Domestic inflow for Q1FY19 was up 44% YoY while international inflow was up ~19% YoY. Order Inflow growth were mainly driven by Infrastructure, Heavy Engineering & Hydrocarbon. Tendering activity continues to be strong in domestic market while outlook in International markets is on improving trend. In domestic markets public sector continues to drive order inflows while private sector is on wait & watch mode. July 25, 2018
Other highlights: 1) The Company maintained guidance of 12.15% sales growth, 10-11% order inflow growth for FY19. 2) NWC at 20% of sales, trying to keep WC in 19-20% range. 3) Hyderabad metro sales of Rs 1bn and Net loss of Rs350mn for the quarter. Strategic Plan: Under its new five-year strategic plan, LT aims to: (a) grow sales at a 12-15% CAGR to reach INR2tn by 2021; (b) increase margins to 11.2%, +120bp over FY16, driven by higher profitability in key manufacturing verticals (power, process, forgings and Kattupalli yard) and hydrocarbons; (c) unlock value via asset sales to drive ROE improvement and reach ROE of 18% by FY21. (d) reduce working capital to 18% of sales. Outlook and Valuation: The stock is trading at 19.8x FY20E earnings. The company continues to focus on its strategic plan of achieving profitable growth and improving RoE in medium term and improving capital allocation We Maintain BUY given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance sheet and being the go to company in the Indian infrastructure space Exhibit 1: SOTP Fair Value (Rs) Basis L&T Core business 1,108 23x March'20 EPS L&T Hydrocarbon business 10 10x FY19E EPS L&T IDPL 73 1.1x P/B L&T InfoTech 206 M.cap L&T Finance Holding 126 68% stake; 20% Hold co discount on current market cap L&T's equity investment in BTG 3 1.5x equity investment Other businesses 40 1.5x book value. Target price 1,566 Source: PL Exhibit 2: Sales Growth Domestic Exports (RHS) 20% 15% 10% 5% 0% -5% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% July 25, 2018 2
(Rs bn) (Rs bn) Larsen & Toubro Exhibit 3: Consolidated Order inflow (Rs bn) Exhibit 4: Consolidated Order book (Rs bn) 500 495 490 485 480 475 470 465 473 496 2,635 2,630 2,625 2,620 2,615 2,610 2,605 2,613 2,631 460 Q1FY19 Q1FY18 2,600 Q1FY19 Q1FY18 Exhibit 5: Q1FY19 Revenue Break-up International 22% Domestic 77% July 25, 2018 3
Exhibit 6: Q1FY19 Result Overview (Rs m) Y/e March Q1FY19 Q1FY18 YoY gr. (%) Q4FY18 FY19E FY18 YoY gr. (%) Net Sales 2,82,835 2,38,109 18.8 4,06,781 13,52,420 11,96,832 13.0 RM cost 1,72,706 1,51,423 14.1 2,69,446 9,47,057 7,71,138 22.8 Personnel cost 42,815 35,306 21.3 41,284 1,60,571 1,52,914 5.0 Other expense 38,181 30,812 23.9 42,146 89,238 1,37,263 (35.0) EBITDA 29,133 20,567 41.6 53,905 1,55,554 1,35,516 14.8 EBITDA margin (%) 10.3 8.6 13.3 11.5 11.3 Other income 2,440 3,849 (36.6) 4,328 15,815 14,318 10.5 PBIDT 31,573 24,416 29.3 58,232 1,71,369 1,49,834 14.4 Depreciation 6,449 5,513 17.0 4,924 20,830 19,287 8.0 Interest 3,648 3,651 (0.1) 4,181 17,693 15,385 15.0 Exceptional Item - - NA - - 1,230 NA PBT 21,477 15,253 40.8 49,128 1,32,845 1,16,391 14.1 Tax 9,346 4,597 103.3 14,580 39,854 31,989 24.6 PAT 12,131 10,655 13.8 34,548 92,992 84,402 10.2 Share in Profit/loss of joint ventures 2,589-372 NA -1,168-4,577-4,359 NA Adjustment for non-controlling interest in subsidiaries 0-1,358 NA -1,705-6,980-6,346 NA Net PAT 14,720 8,925 64.9 31,675 81,435 73,698 10.5 Other comprehensive income 0 1,561 NA -552 0 1,633 NA Total PAT 14,720 10,487 40.4 31,123 81,435 75,331 8.1 Exhibit 7: Segmental Break-up (Rs m) Y/e March (Rs mn) Q1FY19 Q1FY18 YoY gr. (%) Q4FY18 QoQ gr. (%) Revenues Infrastructure 1,23,314 1,13,540 8.6 2,31,360 (46.7) Power 10,806 17,643 (38.8) 15,068 (28.3) Heavy Engineering 11,108 7,313 51.9 11,835 (6.1) Total E&C 1,45,228 1,38,497 4.9 2,58,262 Electrical & Electronics 13,238 12,684 4.4 16,431 (19.4) Hydrocarban 35,162 25,492 37.9 35,591 IT & Technology Services 33,557 25,663 30.8 31,524 6.5 Financial Services 30,575 22,945 33.3 27,221 12.3 Developmental Projects 14,945 12,599 18.6 12,170 22.8 Others 13,732 17,538 (21.7) 31,516 (56.4) Total 2,86,437 2,49,160 15.0 4,12,713 (30.6) Less: Intersegment 3,603 9,262 (61.1) 5,932 (39.3) Net Segment Revenue 2,82,834 2,39,898 17.9 4,06,781 (30.5) PBIT Margins Infrastructure 5.4% 6.5% 12.7% Power 3.1% 0.7% 3.5% Heavy Engineering 14.2% 9.6% 14.7% Total E&C 5.9% 5.9% 12.3% Electrical & Electronics 10.0% 6.2% 16.2% Hydrocarban 6.0% 5.6% 5.0% IT & Technology Services 22.7% 19.2% 17.9% Financial Services 23.8% 15.6% 15.0% Developmental Projects 26.0% -3.9% -16.4% Others -30.4% -2.9% 25.8% July 25, 2018 4
Financials Income Statement (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Net Revenues 10,93,118 11,96,832 13,52,420 15,14,710 YoY gr. (%) 7.2 9.5 13.0 12.0 Cost of Goods Sold 6,13,835 6,65,859 7,78,344 8,72,858 Gross Profit 4,79,283 5,30,973 5,74,076 6,41,852 Margin (%) 43.8 44.4 42.4 42.4 Employee Cost 1,38,540 1,52,925 1,60,571 1,68,600 Other Expenses 69,867 76,929 89,238 1,10,655 EBITDA 1,11,305 1,35,714 1,55,554 1,77,014 YoY gr. (%) 6.4 21.9 14.6 13.8 Margin (%) 10.2 11.3 11.5 11.7 Depreciation and Amortization 23,699 19,287 20,830 22,497 Balance Sheet Abstract (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Non-Current Assets Gross Block 2,04,353 2,44,406 2,74,406 3,04,406 Tangibles 1,76,388 1,98,831 2,28,831 2,58,831 Intangibles 27,965 45,576 45,576 45,576 Acc: Dep / Amortization 39,317 58,604 79,434 1,01,931 Tangibles 29,664 48,952 69,782 92,278 Intangibles 9,653 9,653 9,653 9,653 Net fixed assets 1,65,036 1,85,802 1,94,972 2,02,475 Tangibles 1,46,724 1,49,879 1,59,049 1,66,552 Intangibles 18,313 35,923 35,923 35,923 EBIT 87,606 1,16,427 1,34,724 1,54,517 Margin (%) 8.0 9.7 10.0 10.2 Net Interest 13,387 15,385 17,693 18,578 Other Income 13,441 14,120 15,815 17,713 Capital Work In Progress 1,34,714 1,34,434 1,34,434 1,34,434 Goodwill - - - - Non-Current Investments 5,53,364 7,00,718 7,57,689 8,12,148 Net Deferred tax assets 11,252 14,941 14,941 14,941 Other Non-Current Assets 34,035 45,877 40,573 45,441 Profit Before Tax 87,659 1,15,162 1,32,845 1,53,652 Margin (%) 8.0 9.6 9.8 10.1 Total Tax 20,066 31,989 39,854 47,632 Effective tax rate (%) 22.9 27.8 30.0 31.0 Profit after tax 67,593 83,173 92,992 1,06,020 Minority interest 4,443 6,346 6,980 7,678 Share Profit from Associate (3,953) (4,359) (4,577) (4,805) Adjusted PAT 59,198 72,469 81,435 93,536 YoY gr. (%) 24.3 22.4 12.4 14.9 Margin (%) 5.4 6.1 6.0 6.2 Extra Ord. Income / (Exp) 1,214 1,230 - - Reported PAT 60,412 73,699 81,435 93,536 YoY gr. (%) 29.4 22.0 10.5 14.9 Margin (%) 5.5 6.2 6.0 6.2 Other Comprehensive Income - - - - Total Comprehensive Income 60,412 73,699 81,435 93,536 Equity Shares O/s (m) 933 1,401 1,401 1,401 EPS (Rs) 63.5 51.7 58.1 66.7 Source: Company Data, PL Research Current Assets Investments 1,37,994 94,643 96,643 98,643 Inventories 41,397 48,478 55,579 62,248 Trade receivables 2,79,696 3,46,541 3,70,526 3,94,240 Cash & Bank Balance 55,725 80,325 72,345 50,978 Other Current Assets 4,20,155 4,80,373 5,27,444 5,75,590 Total Assets 21,20,597 24,50,534 26,22,174 27,93,035 Equity Equity Share Capital 1,866 2,803 2,803 2,803 Other Equity 5,00,299 5,53,767 6,04,416 6,67,167 Total Networth 5,02,165 5,56,570 6,07,219 6,69,970 Non-Current Liabilities Long Term borrowings 6,73,406 7,29,148 7,79,148 8,29,148 Provisions 5,266 5,235 5,620 5,901 Other non current liabilities 1,721 680 714 749 Current Liabilities ST Debt / Current of LT Debt 2,66,357 3,46,093 3,56,093 3,66,093 Trade payables 2,97,743 3,77,950 4,07,579 4,14,989 Other current liabilities 3,30,280 3,68,689 4,06,436 4,54,312 Total Equity & Liabilities 21,20,597 24,50,534 26,22,174 27,93,035 Source: Company Data, PL Research July 25, 2018 5
Cash Flow (Rs m) Y/e Mar FY17 FY18 FY19E FY20E Key Financial Metrics Year Y/e Mar FY17 FY18 FY19E FY20E PBT 87,659 1,15,162 1,32,845 1,53,652 Per Share(Rs) Add. Depreciation 23,699 19,287 20,830 22,497 EPS 63.5 51.7 58.1 66.7 Add. Interest 13,387 15,385 17,693 18,578 CEPS 88.9 65.5 73.0 82.8 Less Financial Other Income 13,441 14,120 15,815 17,713 BVPS 538.3 397.2 433.3 478.1 Add. Other (12,766) (14,120) (29,776) (33,069) FCF 34.9 (86.2) (16.9) (27.1) Op. profit before WC changes 1,11,980 1,35,714 1,41,593 1,61,658 DPS 21.0 16.0 22.0 22.0 Net Changes-WC (17,626) (2,11,209) (95,479) (1,21,937) Return Ratio(%) Direct tax (32,017) (31,989) (39,854) (47,632) RoCE 6.3 7.6 8.0 8.6 Net cash from Op. activities 62,337 (1,07,484) 6,260 (7,911) ROIC 5.7 6.2 6.2 6.4 Capital expenditures (28,224) (13,281) (30,000) (30,000) RoE 12.5 13.7 14.0 14.6 Interest / Dividend Income 11,580 14,120 15,815 17,713 Balance Sheet Others (80,759) 40,059 (11,577) (11,805) Net Debt : Equity (x) 1.5 1.6 1.6 1.6 Net Cash from Invt. activities (97,402) 40,898 (25,762) (24,093) Net Working Capital (Days) 8 5 5 10 Issue of share cap. / premium 533 - - - Valuation(x) Debt changes 50,732 83,492 60,000 60,000 PER 20.8 25.5 22.7 19.8 Dividend paid (20,931) (22,390) (30,786) (30,786) P/B 2.5 3.3 3.0 2.8 Interest paid (15,652) (15,385) (17,693) (18,578) P/CEPS 92.0 67.8 75.6 85.8 Others 20,588 - - - EV/EBITDA 17.8 20.3 18.1 16.4 Net cash from Fin. activities 35,271 45,718 11,521 10,637 EV/Sales 1.8 2.3 2.1 1.9 Net change in cash 206 (20,869) (7,980) (21,368) Dividend Yield (%) 1.6 1.2 1.7 1.7 Free Cash Flow 32,550 (1,20,765) (23,740) (37,911) Source: Company Data, PL Research Source: Company Data, PL Research Quarterly Financials (Rs m) Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19 Net Revenue 2,64,468 2,87,475 4,06,781 2,82,835 YoY gr. (%) 6.4 9.4 11.1 18.8 Raw Material Expenses 1,66,499 1,83,770 2,69,446 1,72,706 Gross Profit 97,968 1,03,705 1,37,335 1,10,129 Margin (%) 37.0 36.1 33.8 38.9 EBITDA 29,604 31,440 53,905 29,133 YoY gr. (%) 43.9 6.2 71.5 - Margin (%) 11.2 10.9 13.3 10.3 Depreciation / Depletion 4,306 4,545 4,924 6,449 EBIT 25,298 26,895 48,981 22,684 Margin (%) 9.6 9.4 12.0 8.0 Net Interest 3,929 3,625 4,181 3,648 Other Income 4,013 2,129 4,328 2,440 Profit before Tax 25,382 25,399 49,128 21,477 Margin (%) 9.6 8.8 12.1 7.6 Total Tax 5,439 7,372 14,580 9,346 Effective tax rate (%) 21.4 29.0 29.7 43.5 Profit after Tax 19,943 18,027 34,548 12,131 Minority interest 2,004 1,279 1,705 - Share Profit from Associates (1,107) (1,711) (1,168) 2,589 Adjusted PAT 16,831 15,037 31,675 14,720 YoY gr. (%) 63.1 54.6 (4.2) 64.9 Margin (%) 6.4 5.2 7.8 5.2 Extra Ord. Income / (Exp) - - - - Reported PAT 16,831 15,037 31,675 14,720 YoY gr. (%) 63.1 54.6 (4.2) 64.9 Margin (%) 6.4 5.2 7.8 5.2 Other Comprehensive Income (452) 1,075 (552) - Total Comprehensive Income 16,379 16,112 31,123 14,720 Avg. Shares O/s (m) - - - - EPS (Rs) - - - - Source: Company Data, PL Research July 25, 2018 6
PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly July 25, 2018 7
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> July 25, 2018 8