17 May 2021 Results Review 4QFY21 Larsen & Toubro

17 May 2021 Results Review 4QFY21

Larsen & Toubro

HSIE Research is also available on Bloomberg ERH HDF <GO> & Thomson Reuters

Growth returns

Larsen Toubro (LT) reported revenue/EBITDA/APAT of INR 481/64/34bn,

(5)/6/(5)% beat/(miss) to our estimate. Improvement in EBITDA margin and

strong cash collections were the key positives from the result. With improving

macro in international markets and government’s focus on infrastructure at

home, LT is hopeful of low to mid-teens growth in order inflow. We maintain

BUY on LT, given its (1) strong order book (INR 3.3tn, ~3xFY21 core EPC

revenue), (2) healthy balance sheet, and (3) robust services business. We cut

our FY22 estimates by 9% to account for near-term execution challenges. We

increase our SOTP-based target price to INR 1,800/sh (INR 1,657 earlier). Key

risks: delay in asset monetisation and tepid order inflows.

Near-normal execution recovery: LT reported revenue of INR 481bn

(+9%/+35% YoY/QoQ), 5% less than our estimates. Execution recovered to

normalcy as revenue from core EPC business grew by 8%/53% YoY/QoQ.

EBITDA came 6% ahead of our estimates. Increased productivity, improved

utilisation in IT/ITES, and better profitability in transportation projects led to

expansion of EBITDA margin by 171/126bps to 13.3% (vs 11.9% est.).

Higher-than-expected taxes led to 5% APAT miss. With order book of INR

3.3tn, LT is aiming low to mid-teens growth in execution. While 60% of the

OB is variable price, 40% fixed prices contracts have buffer to protect against

higher commodity prices. LT is targeting steady margins in FY22.

Ordering in international/domestic markets to pick up: LT registered 12%

YoY decline to INR 507bn in 4QFY21, as awarding was deferred. For FY21,

order inflow de-grew by 6% YoY to INR 1.76tn. OB now stands at INR 3.3tn,

providing three years of revenue visibility for the EPC business.

Management believes FY22 will witness healthy ordering in both domestic

and international markets. Total bottom up order pipeline stood at INR

9.6tn, of which 6.6tn is from domestic market. Infrastructure at 77%

constitutes major share of the pipeline, followed by hydrocarbon at 17%.

Order inflow guidance is also pegged at low to mid-teens. Recovery in key

international markets, continuous focus on infrastructure by the

government, and rebound in crude oil prices augur well for LT.

Balance sheet remains comfortable: Net debt reduced to INR 855bn (vs INR

998bn on Dec 20-end). Improvement in working capital led to robust

CFO/FCFF of INR 228/219bn. To guard against the uncertainty, LT has kept

cash reserves at elevated levels (INR 473bn). While IT business is generating

robust cash flow, the recent rights issue has provided enough growth capital

to LT Finance. E&C business would require capital to the extent of working

capital. Hyderabad Metro would require INR 10/20bn support till the

ridership picks up. With core business requiring limited investment, LT may

reward its shareholders with higher dividends.

Consolidated Financial summary

(INR mn) 4QFY21 4QFY20 YoY (%) 3QFY21 QoQ (%) FY20 FY21E FY22E FY23E

Revenues 4,80,879 4,42,453 8.7 3,55,964 35.1 14,54,524 13,59,790 15,63,639 18,17,093

EBITDA 63,889 51,210 24.8 42,800 49.3 1,63,290 1,56,241 1,77,404 2,12,954

APAT 34,173 30,647 11.5 22,574 51.4 95,490 69,010 88,374 1,12,101

EPS (Rs) 24.4 21.8 11.5 16.1 51.4 68.1 49.2 63.0 79.9

P/E (x)

20.8 28.8 22.5 17.7

EV/EBITDA(x)

19.1 18.2 16.1 13.3

RoE (%)

14.8 9.7 11.3 13.4

Source: Company, HSIE Research

BUY

CMP (as on 14 May 21) INR 1,415

Target Price INR 1,800

NIFTY 14,678

KEY

CHANGES OLD NEW

Rating BUY BUY

Price Target INR 1,657 INR 1,800

EPS % FY22E FY23E

-9.1 -0.7

KEY STOCK DATA

Bloomberg code LT IN

No. of Shares (mn) 1,405

MCap (INR bn) / ($ mn) 1,988/26,717

6m avg traded value (INR mn) 6,171

52 Week high / low INR 1,593/777

STOCK PERFORMANCE (%)

3M 6M 12M

Absolute (%) (7.0) 33.6 65.5

Relative (%) (1.2) 22.8 8.8

SHAREHOLDING PATTERN (%)

Dec-20 Mar-21

Promoters 0.0 0.0

FIs & Local MFs 32.96 32.75

FPIs 21.11 22.02

Public & Others 45.93 45.23

Pledged Shares 0.0 0.0

Source : BSE

Parikshit D Kandpal, CFA

[email protected]

+91-22-6171-7317

Chintan Parikh

[email protected]

+91-22-6171-7358

Page | 2

Larsen & Toubro: Results Review 4QFY21

Quarterly Financials Snapshot - Consolidated

(INR mn) 4QFY21 4QFY20 YoY (%) 3QFY21 QoQ (%) FY21 FY20 YoY%

Net Sales 4,80,879 4,42,453 8.7 3,55,964 35.1 13,59,790 14,54,524 (6.5)

Material Expenses 3,30,020 3,06,031 7.8 2,28,670 44.3 8,67,009 9,73,628 (11.0)

Employee Expenses 63,539 62,884 1.0 61,702 3.0 2,47,620 2,31,140 7.1

SG&A Expenses 23,430 22,328 4.9 22,792 2.8 88,920 83,961 5.9

EBITDA 63,889 51,210 24.8 42,800 49.3 1,56,241 1,65,795 (5.8)

Interest Cost 8,531 8,208 3.9 9,620 (11.3) 39,134 28,026 39.6

Depreciation 8,168 7,109 14.9 7,021 16.3 29,042 24,623 17.9

Other Income (Incl. EO) 10,283 6,605 55.7 10,647 (3.4) 34,294 20,227 69.5

PBT 57,474 42,497 35.2 36,805 56.2 1,22,358 1,33,373 (8.3)

Tax 20,867 9,663 116.0 10,408 100.5 40,108 32,632 22.9

Minority Interest 4,029 3,654 10.3 3,910 3.1 13,384 13,453 (0.5)

Associate Profits 1,595 1,467 8.8 86 1,759.1 144 1,655 (91.3)

PAT from discontinued

operations (1,245) 1,324

2,093

46,819 6,546

Reported PAT 32,928 31,971 3.0 24,667 33.5 1,15,829 95,490 21.3

E/o + PAT from disc.

Operations (1,245) 1,324

2,093

46,819

APAT 34,173 30,647 11.50 22,574 51.4 69,010 95,490 (27.7)


Margin Analysis

4QFY21 4QFY20

YoY

(bps) 3QFY21

QoQ

(bps) FY21 FY20

YoY

(bps)

Material Expenses as % of Net Sales 68.6 69.2 (53.8) 64.2 438.9 63.8 66.9 (317.7)

Employee Expenses as % of Net Sales 13.2 14.2 (99.9) 17.3 (412.1) 18.2 15.9 231.9

Other operating expenses as % of Net

Sales 4.9 5.0 (17.4) 6.4 (153.1) 6.5 5.8 76.7

EBITDA Margin (%) 13.3 11.6 171.2 12.0 126.2 11.5 11.4 9.2

Tax Rate (%) 36.3 22.7 1,357.0 28.3 803.0 32.8 24.5 831.3

Net Profit Margin (%) 7.1 6.9 18.0 6.3 76.5 5.1 6.2 (110.4)


Revenue – INR 480bn

(+8.7%/35.1% YoY/QoQ, 5%

miss)

EBITDA – INR 63.9bn

(+24.8%/49.3% YoY/QoQ,

beat of 6%)

EBITDA margin: 13.3%

(+171/+126bps YoY/QoQ, est.

11.9%)

Finance cost: INR 8.5bn

(+4%/-11% YoY/QoQ)

Other income: INR 10.3bn

(+56%/-3% YoY/QoQ)

PBT: INR 57.4bn

(+35%/+56% YoY/QoQ, 10%

ahead of our estimates)

Associate profit: INR 1,595

mn vs INR 1,467mn/ 86 mn

YoY/QoQ

Loss from discontinued

operations: INR 1.2bn (INR

1.3/2.1bn 4QFY20/3QFY21)

RPAT inc. discontinued

operations: INR 32.9bn

(3%/33.5% YoY/QoQ)

APAT: INR 34.1bn

(+11.5%/+51%); Higher

effective tax rate (36.3%) led

to 5% miss on APAT

Page | 3


Key call takeaways

Execution had recovered to near normalcy in 4QFY21 but second wave of the

pandemic put a spanner into that. At the end of Mar-21, company had labor force

of 240,000 and LT was looking to ramp it up to 275,000 given strong backlog. The

2nd wave has led to reduction of 20% in the work force. However, LT was able to

retain remaining work force at the labor camps at the construction sites.

Order book stood at INR 3.3tn at the end of Mar-21. INR 1tn of the order book is

funded by multi lateral agencies. International constituted 21% of the OB.

Domestic OB stood at INR 2.6tn, with state govt., central govt., PSUs and Pvt.

forming 31%, 9%, 44% and 16% respectively. With strong and diversified order

book of INR 3.3tn, LT has guided for low to mid-teen growth in execution.

Concentration of OB in public sectors mitigates the risk of default. INR 3.3tn OB

is net of slow moving orders and entirely executable.

Management believes FY22 will witness healthy ordering in both domestic and

international markets and sees 8-10% more prospects than in FY21. Total bottom

up order pipeline stood at INR 9.6tn, of which 6.6tn is from domestic market.

Infrastructure at 77% constitutes major share of the pipeline, followed by

hydrocarbon at 17%. Order inflow guidance is also pegged at low to mid-teens.

There are also opportunities in building data centers as more and more data is

being consumed.

At home, government policies are directed towards creating infrastructure and

govt. has provided enough fiscal resources to continue with the ordering. Even,

international money is focusing on India to fund water, transmission and metro

projects. Given that govt. resources are directed towards fighting the pandemic

currently, ordering would be lumpy in 2HFY22. INR 8-10tn capex happen in the

system and LT has 15-20% share in the ordering.

Internationally, some of the countries did better than India in fighting the COVID

and they are also doing the infra spending to kick start the economy. Crude

prices are now back in the USD 60-80/barrel range, which entails significant

capital expenditure in the Middle East. Bottom up pipeline for the hydrocarbon

sector is at INR 1.4tn, with domestic at INR 600bn and international at INR

800bn. FY22 could see return of ordering due to muted ordering in last 1-1.5

years. Also, increase in commodity prices could bring the private capex, which

has been subdued for a while.

At group level, customer collections stood at INR 1.26tn, of which INR 760bn

were at the parent level. Strong collection helped in reducing the working capital

from 23.7% to 22.3% of sales. OCF and FCFF of INR 228/219bn during FY21.

EBITDA margin improved to 11.5% vs 11.2% in 4QFY20 despite the challenges in

execution and higher commodity prices. Management stated that there was no

one-off and attributed it to improved efficiencies. Also some of the transportation

projects were back in black which contributed in the margin. L&T is one of the

biggest buyers of raw materials so it works in favor to procure at reasonable

prices.

Management has guided for the steady margins in FY22. 60% of the contracts are

variable price contracts so it would protect against higher commodity prices. For

the rest 40% fixed price contract, management believes there is enough cushion to

protect the margin against sustained higher commodity prices.

Discussions with clients over under recoveries are ongoing. Normally all these

conversations go through till completions. Clients are generally sympathetic to

Page | 4


the cause as they do realize the issues. LT is focusing on the project completion

with the desired quality. Most of the clients are repeat clients so LT is reasonably

confident of getting the COVID-19 under recovery claims from the clients.

LT sees headwinds in the power sector as an opportunity. It believes it is much

ahead in transition compared to competition. The way fuel is used will change

dramatically. Management sees lot of opportunity in clean energy space. It

recently won one of the largest solar power projects in Saudi Arabia.

Hyderabad Metro is a top class asset and has 60 year concession period left. But

it’s unfortunate that the ridership is next to nothing given the pandemic

situation. All the options are being explored from restructuring debt to getting

under recovery claims and monetization of TOD. Currently govt is focused on

health care. In this year’s budget, Telangana govt. has budgeted Rs 10bn towards

metro, and LT hopes it finds its way to Hyderabad Metro.

Cash reserves build up to guard against any uncertainty. LT has declared final

dividend of INR 18/sh. Earlier it had approached SEBI for the buyback. But, as

per SEBI guidelines, debt of financial business would also be considered. So it

looks challenging to do buyback unless rules changes. So to reward investors, LT

may go through the dividend route.

LT will definitely come out of the power development business. It does not

envisage running a power utility business. So, all utility assets will be divested in

near future. Services businesses other than financial business are generating

enough cash flow for them, so no further allocation required. E&C business does

not require much investment apart from working capital. Financial business

recently did a rights issue, so has enough capital. Hyderabad Metro will require

INR 10-20bn in till ridership picks up.

L&T Finance is well positioned to grow after the rights issue. LT believe there is a

space for NBFC to grow in India’s credit delivery system. It has been doing well

and will continue in the services business.

As far as LT Realty is concern, the business is limited to select markets. Much of

the projects LT is doing are on the land provided by the parent when it moved its

manufacturing to the other places. Given the owned land, LT has flexibility to

time the project and match demand with supply. Given the stamp duty cut, it did

reasonable business in Maharashtra. As it grows in size, LT Realty could also

look at other land parcels.

Shipyard is very precious assets. It is next to impossible to get waterfront area in

a metropolis area. Apart from the shipyard building, fabrication work is carried

out for the hydrocarbon projects. Govt. policies are also looking at a naval

program to enhance India’s maritime capabilities. India requirement is well

documented. PSUs are swarmed with orders and deliveries are largely delayed.

LT has demonstrated its capability in the past by delivering much ahead of the

time. However govt. has been little slow to opening up to the private

shipbuilders. But LT hopes things would change and benefit LT.

In defense, there are no hard assets or space locked up for business. Its all

engineering skill, which are utilized in the other works. Currently, it forms 2-3%

of LT’s revenue but potential is much greater.

RoE target is still 18%. Sans pandemic, LT was well on track to achieve the target.

Asset monetization, re-orienting the businesses earning less than the cost of

capital, growing in core and services business, cost optimization are some

measures that LT will deploy to achieve the target.

Page | 5


Consolidated Segmental Revenue

INR mn 4QFY21 4QFY20 YoY (%) 3QFY21 QoQ (%) FY21 FY20 YoY%

Segmental Revenues

-Infrastructure 2,64,367 2,55,597 3.4 1,59,732 65.5 6,19,616 7,37,773 (16.0)

-Power 12,202 5,653 115.9 9,037 35.0 31,926 23,185 37.7

-Heavy engineering 10,819 7,016 54.2 8,034 34.7 30,185 32,050 (5.8)

-Defence 11,408 9,281 22.9 10,240 11.4 34,101 39,792 (14.3)

-Hydrocarbon 54,217 49,792 8.9 44,224 22.6 1,69,638 1,74,455 (2.8)

E&C business 3,53,014 3,27,339 7.8 2,31,267 52.6 8,85,467 10,07,254 (12.1)

-E&A - 12,391 (100.0) 48 (100.0) 16,057 55,670 (71.2)

-IT and TS 68,454 64,613 5.9 65,301 4.8 2,56,188 2,23,352 14.7

-Financial Services 33,767 33,657 0.3 34,007 (0.7) 1,34,036 1,38,224 (3.0)

-Dev. projects 11,138 9,815 13.5 8,138 36.9 36,214 48,503 (25.3)

-Others 19,065 12,066 58.0 20,507 (7.0) 60,928 53,087 14.8

-Intersegment revenue (4,559) (5,037) (9.5) (3,256) 40.0 (13,041) (16,995) (23.3)

-Discontinued Operations - (12,391) (100.0) (48) (100.0) (16,057) (55,670)

Total 4,80,879 4,42,453 8.7 3,55,964 35.1 13,59,790 14,53,426 (6.4)

EBIT

-Infrastructure 27,955 26,266 6.4 8,226 239.8 45,215 52,073 (13.2)

-Power 949 2,032 (53.3) 88 980.0 1,112 2,361 (52.9)

-Heavy engineering 2,806 1,057 165.6 1,347 108.3 4,883 5,660 (13.7)

-Defence 3,028 1,236 144.9 1,384 118.9 6,170 5,758 7.1

-Hydrocarbon 6,583 5,023 31.1 4,932 33.5 15,683 17,462 (10.2)

E&C business 41,322 35,613 16.0 15,977 158.6 73,064 83,315 (12.3)

-E&A - 1,877 (100.0) (32) (100.0) 844 8,881 (90.5)

-IT and TS 13,660 10,230 33.5 13,595 0.5 48,232 36,932 30.6

-Financial Services 7,308 4,467 63.6 3,520 107.6 12,858 26,787 (52.0)

-Dev. projects (652) (96) 580.4 (760) (14.2) (1,966) 3,873 (150.8)

-Others 2,333 1,505 55.0 6,553 (64.4) 11,230 9,694 15.8

-Disc. Operations - (1,877) (100.0) 32 (100.0) (844) (8,881) (90.5)

Total 63,972 51,720 23.7 38,885 64.5 1,43,418 1,60,601 (10.7)


Segmental Margin (EBITDA): Consolidated Trend

(in %) 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21

Infra 6.4 7.1 6.1 11.1 6.2 6.3 6.1 11.4

Power 3.3 4.2 3.4 37.6 1.1 3.0 2.0 8.5

Heavy Engineering 19.5 24.9 23.5 23.5 15.5 4.4 18.2 27.1

Defence 16.5 17.9 20.5 17.5 12.8 24.3 16.8 29.3

Hydrocarbons 7.6 12.5 12.1 11.0 5.3 8.5 12.2 13.0

Others 24.1 21.8 21.9 21.9 6.2 17.4 33.3 13.5

IT & services 23.2 19.5 21.0 21.0 20.6 23.0 25.4 24.2

Financial Services 22.0 22.5 21.3 13.8 3.6 3.8 11.0 22.3

Development projects 10.0 10.2 17.3 6.1 7.0 5.3 0.1 8.4


Revenue from core EPC

business grew by 8% YoY

Labour availability had

improved to near-normal

level, but second wave led

to some labour migration

Services business remained

resilient with IT & ITES

registering growth of 6%

and finance clocking

flattish revenue

Power segment revenue

reported 116% YoY growth

on large opening order

book

Higher PLF in Nabha

Power led to 13.5% YoY

growth in Developmental

Projects

Others segment reported

58% YoY growth led by

Smart World &

Communications,

Construction & Mining

Equipment, Rubber

Processing Machinery and

Industrial Valves

Page | 6


4QFY21 Segmental EBITDA breakup


4QFY21 Segmental Net Assets Employed


Order Book Break-up (4QFY21-INR 3.3tn)


EBITDA margin of infra

segment improved 30bps

YoY to 11.4%

Margins of IT business

improved from 21% to

24.2%YoY on improved

utilization of manpower

and cost rationalisation

Margins in developmental

business largely

attributable to pick-up in

power demand at Nabha

Power

EBITDA of power, defence

and heavy engineering

reflective of job mix

Net capital employed

stood at INR 879bn at the

end of 4QFY21

LT reported order book at

INR 3.31tn

Share of infra in order

book increased by 1% YoY

on relatively better order

wins for the segment in

FY21

International orders

constitute 21% of the

order book

30.2

16.6

7.5

2.6 7.0

2.9 3.3

0.9 1.0 -

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Infr

a

IT S

erv

ices

Fin

. Ser

vic

es

Oth

ers

Hy

dro

carb

on

Hea

vy

En

g.

Def

ence

Dev

. Pro

ject

s

Po

wer

EBITDA (Rs bn) - LHS Margins (%) - RHS

Infra

252

Power

20 Heavy Eng.

17

Defence

21

Hydrocarbon

30 E&A

-

IT Services

234

Fin. Services

174

Dev. Projects

214

Others

77 Rs bn

Infra

75%

Power

4%

Heavy Eng.

1%

Defence

2%

Hydrocarbon

14%

Services

0%

Others

4%

Page | 7


Order Inflow Breakup (4QFY21-INR 507bn)


Infra Segment Order Inflow Trend


Ex-Services (Ex-Infra)- Order Inflow Trend


Order inflow for the

quarter stood at INR

507bn, a decline of 12%

YoY

Of the total order wins in

the quarter, 64% of the

orders came from domestic

clients

Infrastructure segment

registered 24% YoY decline

in order inflow

Order wins were largely in

Health and Urban Water

Management;

International orders

constituted 34% of the

order inflow

Order inflow ex-services

and ex-infra came in at

INR 81bn (vs INR 119bn in

4QFY20)

Infra

62%

Power

2%

Heavy Eng.

3%

Defence

1%

Hydrocarbon

7%

Services

22%

Others

3%

122%

26%

-42%

21%

-6%

41%

-43%

-10%

79%

47%

-72%

28%

213%

-31%

-100%

-50%

0%

50%

100%

150%

200%

250%

-

100

200

300

400

500

3QF

Y18

4QF

Y18

1QF

Y19

2QF

Y19

3QF

Y19

4QF

Y19

1QF

Y20

2QF

Y20

3QF

Y20

4QF

Y20

1QF

Y21

2QF

Y21

3QF

Y21

4QF

Y21

Inflows (Rs bn) - LHS % Change (QoQ) - RHS

71%

-44% -1

%

18% 19

%

54%

-21%

72%

-91%

524%

-81% 19

%

514%

-52%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

-

50

100

150

200

250

3QF

Y18

4QF

Y18

1QF

Y19

2QF

Y19

3QF

Y19

4QF

Y19

1QF

Y20

2QF

Y20

3QF

Y20

4QF

Y20

1QF

Y21

2QF

Y21

3QF

Y21

4QF

Y21

Inflows (Rs bn) - LHS % Change (QoQ) - RHS

Page | 8


Segmental Order inflow Trend

Order Inflows (INR bn) 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21

Infrastructure 175 157 281 412 113 145 454 314

Power 67 43 8 12 - - - 10

Heavy Engineering* 2 7 5 5 5 3 7 15

Defence 4 6 2 7 1 13 7 5

Subtotal 6 13 7 12 6 17 15 20

Hydrocarbons 34 149 - 22 12 - 132 35

Others 20 15 4 73 5 11 22 15

Ex Services Inflows 302 375 300 532 137 173 622 395

Services 85 107 116 47 99 107 110 112

Total Inflow 387 482 416 579 236 280 732 507


Segmental Order Book Trend

INR bn 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 2QFY21 3QFY21 4QFY21

Infrastructure 2,187 2,153 2,236 2,249 2,197 2,212 2,450 2,456

Power 129 152 184 152 153 149 132 131

Heavy Engineering* 41 30 31 30 31 30 33 33

Defense 112 121 92 91 92 90 99 65

Subtotal 153 152 123 122 122 120 132 98

Hydrocarbons 403 515 459 456 427 389 464 458

Others 68 61 61 61 153 120 132 131

Total Order Book 2,940 3,032 3,063 3,039 3,051 2,989 3,311 3,274


Change in Estimates

INR mn FY22E FY23E

New Old % diff New Old % diff

Net Revenues 15,63,639 16,59,776 (5.79) 18,17,093 18,38,588 (1.17)

EBITDA 1,77,404 1,91,479 (7.35) 2,12,954 2,14,168 (0.57)

Margins (%) 11.3 11.5 (19.1) 11.7 11.6 7.1

APAT 88,374 97,204 (9.1) 1,12,101 1,12,904 (0.7)


Valuation Summary

Business Valuation methodology INR bn INR/sh

L&T E&C business 21x Mar-23 E&C Earnings 1,636 1,166

L&T Infotech HSIE TP with 25% holdco disc. 410 293

L&T Tech services HSIE TP with 25% holdco disc. 136 97

Mindtree HSIE TP with 25% holdco disc. 166 118

L&T Finance Mcap with 25% holdco disc 100 71

Other Subs, Associates and

Developmental Portfolio 0.5x P/BV of Invested Equity 75 54

Target price (TP)

2,524 1,800

Source: HSIE Research

While L&T reported order

wins of INR 314bn for

infra segment in the

quarter, ordering in power,

heavy engineering and

defence was muted

International ordering

picked up sharply,

particularly in the Middle

East as crude prices inched

up higher

Reported order book of

INR 3.3tn is well

diversified and is net of

slow moving orders which

gives revenue visibility of

~3 years for core EPC

business

We reduce our FY22

estimates by 9% to

account for challenges in

execution in 1HFY22 and

tweak FY23 estimates

marginally

We maintain our BUY on

L&T with an increased TP

of INR 1,800/sh (INR 1,657

earlier) as we roll forward

to Mar-23 EPS of E&C

business and update

valuation of services

business

Page | 9


Financials Consolidated Income Statement Year ending March (INR mn) FY18 FY19 FY20 FY21 FY22E FY23E

Net Revenues (including E&A) 11,96,831 13,52,203 14,54,524 13,59,790 15,63,639 18,17,093

Growth (%) 9.5 13.0 7.6 (6.5) 15.0 16.2

Material Expenses 7,71,067 8,82,474 8,93,208 8,67,009 9,92,905 11,51,979

Employee Expenses 1,52,925 1,74,664 2,31,140 2,47,620 2,63,537 2,92,151

Other Operating Expenses 1,37,127 1,41,768 1,66,886 88,920 1,29,793 1,60,009

EBIDTA 1,35,713 1,53,296 1,63,290 1,56,241 1,77,404 2,12,954

EBIDTA (%) 11.3 11.3 11.2 11.5 11.3 11.7

EBIDTA Growth (%) 22.5 13.0 6.5 (4.3) 13.5 20.0

Depreciation 19,287 19,230 24,623 29,042 31,077 32,572

EBIT 1,16,426 1,34,066 1,38,667 1,27,199 1,46,327 1,80,381

Other Income (Incl. EO Items) 15,350 21,313 23,609 81,113 30,500 32,025

Interest 15,385 18,026 27,967 39,134 36,191 36,937

PBT 1,16,391 1,37,353 1,34,310 1,69,177 1,40,635 1,75,469

Tax 31,989 40,671 32,632 40,108 37,268 46,499

Minority Interest 6,346 7,421 6,907 13,384 15,505 17,540

Share of Associate profits (4,359) (210) 720 144 512 671

RPAT 73,698 89,051 95,490 1,15,829 88,374 1,12,101

EO items (net of tax) (1,230) (2,948) - (46,819)

APAT 72,468 86,104 95,490 69,010 88,374 1,12,101

APAT Growth (%) 22.4 18.8 10.9 (27.7) 28.1 26.8

EPS 51.7 61.4 68.1 49.2 63.0 79.9

EPS Growth (%) 22.4 18.8 10.9 (27.7) 28.1 26.8

Consolidated Balance Sheet As at March (INR mn) FY18 FY19 FY20 FY21 FY22E FY23E

SOURCES OF FUNDS

Share Capital 2,803 2,806 2,808 2,809 2,809 2,809

Reserves 5,53,767 6,20,943 6,64,424 7,55,876 7,99,362 8,62,086

Total Shareholders Funds 5,56,570 6,23,748 6,67,232 7,58,685 8,02,171 8,64,895

Minority Interest 56,250 68,261 95,208 1,20,515 1,36,020 1,53,560

Long Term Debt 8,81,922 9,63,313 10,59,861 10,48,394 10,38,394 10,28,394

Short Term Debt 1,93,319 2,92,238 3,50,210 2,77,658 2,67,658 2,57,658

Total Debt 10,75,241 12,55,552 14,10,071 13,26,052 13,06,052 12,86,052

Other Non Current Liabilities 9,455 9,122 33,825 26,469 26,469 26,469

Deferred Taxes 6,379 3,111 14,530 11,787 11,787 11,787

TOTAL SOURCES OF FUNDS 17,03,895 19,59,794 22,20,867 22,43,509 22,82,500 23,42,764

APPLICATION OF FUNDS

Net Block 1,26,726 1,51,125 2,97,008 3,05,841 2,98,266 2,86,196

CWIP 1,34,434 1,39,195 33,111 5,004 6,004 7,004

Goodwill 15,618 18,269 80,114 80,670 80,670 80,670

Investments 1,01,929 1,14,287 1,32,889 1,42,837 1,57,120 1,72,833

Other Non Current Assets 9,04,470 10,37,460 10,85,266 9,67,139 9,85,942 10,05,120

Total Non-current Assets 12,83,177 14,60,336 16,28,388 15,01,490 15,28,001 15,51,822

Inventories 48,478 64,139 57,467 58,205 59,846 69,434

Debtors 3,46,541 3,70,382 4,07,315 4,22,298 4,88,424 5,68,195

Cash & bank balances 1,74,968 2,56,724 2,78,176 4,72,527 4,43,264 4,38,710

ST Loans & Advances 23,536 24,890 22,383 11,312 16,968 19,514

Other Assets 5,59,215 6,14,870 6,87,673 6,46,904 6,72,780 7,53,514

Total Current Assets 11,52,737 13,31,005 14,53,014 16,11,247 16,81,283 18,49,367

Creditors 3,15,714 4,29,948 4,36,439 4,55,046 4,89,652 5,68,099

Other Current Liabilities & Provns 4,16,305 4,01,598 4,24,095 4,14,182 4,37,133 4,90,326

Total Current Liabilities 7,32,019 8,31,546 8,60,534 8,69,228 9,26,785 10,58,425

Net Current Assets 4,20,718 4,99,459 5,92,479 7,42,019 7,54,499 7,90,942

Misc Expenses & Others - - -

TOTAL APPLICATION OF FUNDS 17,03,895 19,59,794 22,20,867 22,43,509 22,82,500 23,42,764


Page | 10


Consolidated Cash Flow Year ending March (INR mn) FY18 FY19 FY20 FY21 FY22E FY23E

PBT 1,15,162 1,42,862 1,43,142 2,30,263 1,41,147 1,76,140

Non-operating & EO items (10,696) (9,992) (2,192) (1,21,213) (30,500) (32,025)

Interest expenses 8,729 9,020 19,676 25,358 36,191 36,937

Depreciation 19,287 19,230 24,623 29,042 31,077 32,572

Working Capital Change (1,98,757) (1,62,472) (77,845) 99,702 (60,545) (60,175)

Tax paid (34,034) (45,816) (40,465) (34,710) (37,268) (46,499)

OPERATING CASH FLOW ( a ) -1,00,310 -47,168 66,939 2,28,441 80,102 1,06,950

Capex (20,150) (34,746) (32,994) (9,223) (24,502) (21,503)

Free cash flow (FCF) -1,20,461 -81,914 33,945 2,19,218 55,600 85,447

Investments 19,025 (82,801) 37,827 (1,77,111) (14,284) (15,712)

Non operating income 40,270 7,553 (87,395) 1,32,046 30,500 32,025

INVESTING CASH FLOW ( b ) 39,145 -1,09,994 -82,563 -54,288 -8,286 -5,190

Share capital Issuance 495 113 176 159 - -

Debt Issuance 1,26,190 1,78,653 1,38,176 (87,325) (20,000) (20,000)

Dividend Payment (23,898) (26,471) (45,513) (36,509) (44,888) (49,377)

Interest expenses (24,707) (29,824) (27,397) (33,880) (36,191) (36,937)

Others 15,624 31,938 (1,726) 4,811 - -

FINANCING CASH FLOW ( c ) 93,705 1,54,410 63,716 (1,52,744) (1,01,079) (1,06,314)

NET CASH FLOW (a+b+c) 32,539 -2,752 48,092 21,409 -29,263 -4,554

Opening Cash & Equivalents 1,96,062 1,74,968 2,56,724 2,78,176 4,72,527 4,43,264

Closing Cash & Equivalents 1,74,968 2,56,724 2,78,176 4,72,527 4,43,264 4,38,710

Key Ratios

FY18 FY19 FY20 FY21 FY22E FY23E

PROFITABILITY (%)

GPM 35.6 34.7 38.6 36.2 36.5 36.6

EBITDA Margin 11.3 11.3 11.2 11.5 11.3 11.7

EBIT Margin 9.7 9.9 9.5 9.4 9.4 9.9

APAT Margin 6.1 6.4 6.6 5.1 5.7 6.2

RoE 13.7 14.6 14.8 9.7 11.3 13.4

Core RoCE 6.4 6.3 6.2 5.6 6.6 7.9

RoCE 5.3 5.4 5.7 4.5 5.2 6.1

EFFICIENCY

Tax Rate (%) 27.5 29.6 24.3 23.7 26.5 26.5

Asset Turnover (x) 3.8 6.0 3.7 3.2 3.5 3.8

Inventory (days) 15 17 14 16 14 14

Debtors (days) 106 100 102 113 114 114

Other Current Assets (days) 178 173 178 177 161 155

Payables (days) 96 116 110 122 114 114

Other Current Liab (days) 127 108 106 111 102 98

Net Working Capital Cycle (Days) 75 66 79 72 73 71

Debt/EBITDA (x) 7.9 8.2 8.6 8.5 7.4 6.0

Net D/E 1.6 1.6 1.7 1.1 1.1 1.0

Interest Coverage 7.6 7.4 5.0 3.3 4.0 4.9

PER SHARE DATA

EPS (Rs/sh) 51.7 61.4 68.1 49.2 63.0 79.9

CEPS (Rs/sh) 65.4 75.1 85.6 69.9 85.2 103.1

DPS (Rs/sh) 17 19 32 26 32 35

BV (Rs/sh) 397 445 476 541 572 617

VALUATION

P/E 27.4 23.1 20.8 28.8 22.5 17.7

P/BV 3.6 3.2 3.0 2.6 2.5 2.3

EV/EBITDA 21.3 19.5 19.1 18.2 16.1 13.3

OCF/EV (%) (3.5) (1.6) 2.1 8.0 2.8 3.8

FCF/EV (%) (4.2) (2.7) 1.1 7.7 2.0 3.0

FCFE/Market Cap (%) (1.0) 3.4 7.3 4.9 (0.0) 1.4

Dividend Yield (%) 1.2 1.3 2.3 1.8 2.3 2.5


Page | 11


Rating Criteria

BUY: >+15% return potential

ADD: +5% to +15% return potential

REDUCE: -10% to +5% return potential

SELL: > 10% Downside return potential

Date CMP Reco Target

7-Jun-20 957 BUY 1,236

15-Jul-20 913 BUY 1,235

24-Jul-20 916 BUY 1,260

12-Oct-20 906 BUY 1,260

29-Oct-20 935 BUY 1,260

12-Jan-21 1,350 BUY 1,260

21-Jan-21 1,383 BUY 1,602

27-Jan-21 1,361 BUY 1,657

23-Feb-21 1,452 BUY 1,657

13-Apr-21 1,374 BUY 1,657

17-May-21 1,415 BUY 1,800

From 2nd March 2020, we have moved to new rating system

RECOMMENDATION HISTORY

700

900

1,100

1,300

1,500

1,700

1,900

Ma

y-2

0

Jun

-20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Ma

r-2

1

Ap

r-2

1

Ma

y-2

1

L&T TP

Page | 12


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