SFM_L&T_final

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Strategic Financial Management

Larsen & Toubro Solutions Ltd.

Submitted to:Prof. S C Bansal

Date of submission:

August 29, 2013

Submitted by:

Sumedha Verma WMP7060

Vandana Singh WMP7062

Asheesh Verma WMP7083

Nupur Mittal WMP7106

Indian Institute of Management, Lucknow (NOIDA Campus)


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Table of Contents

About Larsen & Toubro ................................................................................................................................. 3

Company Profile ........................................................................................................................................................................... 3

Industry Analysis ........................................................................................................................................... 5

Outlook ........................................................................................................................................................................................ 5

SWOT Analysis ............................................................................................................................................................................. 7

Financial Statement Analysis ........................................................................................................................ 8

Ratio Analysis ............................................................................................................................................................................... 8

Current Ratio ......................................................................................................................................... 8

Quick ratio ............................................................................................................................................. 8

Absolute Liquid ratio ............................................................................................................................. 9

Debt Equity ratio ................................................................................................................................... 9

Proprietary ratio .................................................................................................................................. 10

Gross Profit ratio ................................................................................................................................. 10

Net Profit ratio .................................................................................................................................... 11

Operating profit ratio .......................................................................................................................... 11

Operating Ratio ................................................................................................................................... 12

Staff Expenses ..................................................................................................................................... 12

Capital Turnover ratio ......................................................................................................................... 13

Fixed Assets Turnover ......................................................................................................................... 13

Stock Turnover ratio ........................................................................................................................... 14

Debtors Turnover ratio ...................................................................................................................... 14

Creditors Turnover ratio ..................................................................................................................... 15

MAJOR FINDINGS ................................................................................................................................ 15

Cash Flow Projections ................................................................................................................................. 16

Discount Rate Calculation ........................................................................................................................... 17

Valuation Methods ..................................................................................................................................... 18

Market Valuation ...........................................................................................................................Error! Bookmark not defined.

Discounted cash flow (DCF) analysis .......................................................................................................................................... 18

Sensitivity Analysis .............................................................................................................................. 20

Multiples Method ...................................................................................................................................................................... 20

Conclusion ................................................................................................................................................... 21

References .................................................................................................................................................. 22


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About Larsen & Toubro

Company Profile

Larsen & Toubro is a US$14 billion technology, engineering, construction and manufacturing company,

with global operations. The Company addresses critical needs in key sectors including infrastructure,

construction, hydrocarbon, defence and power. Larsen & Toubro Limited (L&T) is a technology,

engineering, construction and manufacturing company. It is one of the largest and most respected

companies in India's private sector.A strong, customer-focused approach, conformance to global HSE

standards and the constant quest for top-class quality have enabled the Company to sustain leadership

in its major lines of business for over 75 years. L&T is ranked 4th by Newsweek in the global list of green

companies in the industrial sector. Forbes rates L&T the 9th Most Innovative Company in the world.

Company History

The evolution of L&T into a major engineering and construction organisation is among the more

remarkable success stories in Indian industry. It was founded in Mumbai (then Bombay) in 1938 by two

Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro. Beginning with the import of

machinery from Europe, L&T took on engineering and construction assignments of increasing

sophistication. Today, the company sets engineering benchmarks in terms of scale and complexity.

Financial Credibility

L&T was the first company in India in the engineering & construction space to publicly disclose its

sustainability performance. The Companys annual Sustainability Reports highlight achievements and

objectives across the traditional three Ps of Planet, People and Profits. All our Reports are rated A+ by

the Netherlands-based Global Reporting Initiatives, indicating the highest level of disclosure. The

recognition that the Company has secured from forums around the world affirm public perception of

L&T as an organization that contributes significantly to the wellbeing of people.

Record of Achievements

The prestigious Terminal 3 of New Delhi airport - constructed in a record 36 months

Indias first monorail in Mumbai

Building major infrastructure projects including ports and metro rail systems

Technological support for Chandrayaan I Indias maiden moon mission, and for INS Arihant -

Indias first nuclear powered submarine

The world's largest coal gasifier made in India and exported to China

The worlds biggest EO reactor for a petrochemical complex in the Gulf The worlds largest FCC regenerator for a refinery

It has a spread in different sectors like Hydrocarbon, Heavy Engineering, Construction, Power, Electrical

and automation, Machinery and Industrial Products, Information technology, Financial Services, Ship-

building and Railway Projects


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FinancialSummary

L&T recorded Gross Revenue of Rs. 61471 crore for the year ended March 31, 2013, registering an

increase of 14.4% on a y-o-y basis over the corresponding previous year. International Revenue at Rs.

12110 crore doubled as compared to the previous year. The Gross Revenue for the quarter ended March

31, 2013 at Rs. 20485 crore recorded 10% growth over the corresponding quarter of the previous year,

as certain sectoral bottlenecks moderated the pace of execution.

The Company successfully garnered fresh orders worth ` 88035 crore during the year 2012-13, recording

a healthy y-o-y growth of 25%. The order Inflow during the quarter January-March 2013 was Rs. 27929

crore and recorded an impressive increase of 32%, despite challenging economic environment.

International order inflow constituted 17% of the total order inflow for the year 2012-13. The major

orders during the year came from Building & Factories, Power Transmission & Distribution,

Transportation Infrastructure and Power sectors.


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Industry Analysis

Outlook

Even as the macro environment remains challenging, yourCompany is effectively targeting specific

opportunitieswithin India and internationally. Segments that holdpromise in FY14 include

1. Infrastructure -

a. Roads This segment witnessed severecontraction in ordering by NHAI in FY13 but is

expected to pick up in FY14 through ordering ofmore than 3,500 km of new projects on

Engineering, Procurement & Construction (EPC) mode. Webeing the distinct leader in

the segment, willselectively participate in these EPC bids wherethe prospects meet our

internal viability benchmarks.Some upcoming road projects in the Gulf countriesare also

being targeted in FY14.

b. Metro and Mono Rails The Company has beeninvolved in the execution of metro rail

projectsin cities across the country and Indias first monorailin Mumbai (trial runs

conducted in FY13). Thisenables the Company to exploit opportunities tosecure

contracts in India, where multiple cities areinitiating metro rail projects. We are

alsoparticipating in mass rapid transport prospects inthe Gulf countries.

c. Railways Business The thrust on strengtheningthe rail network across the country

holds goodprospects for our railways business. We havealready secured an initial order

in consortium witha Japanese company for a major section ofthe Dedicated Freight

Corridor. We are alsoexploring international markets, especially the Gulfcountries

where several projects are coming up.

d. Water & Renewable Energy Backed by strongproject execution capabilities and

operationalexcellence, the Company has achieved goodgrowth in Water and Renewable

Energy sectorin FY13. With current Order Backlog and goodorder prospects, the

business from these sectors isexpected to see an upswing in FY14.

e. Urban Infrastructure Opportunities in residential buildings, office space, hospitals,

hotels,educational institutions, shopping complexes andfactories continue to provide a

large canvass ofbusiness potential. Your Company has become theEPC contractor of

choice for major developers andthis is driving profitable growth.

f. Airports Increasing passenger and cargo traffichas sustained growth in aviation

industry. On theback of excellent track record in this sector, we arewell-positioned for

airport projects within and outsideIndia.

2. Heavy Engineering & Shipbuilding -

We have the capability to meet the requirements for hightechnology critical equipment and

systems. In the processplant equipment segment, the international market looks promising in the

medium term. The domestic nuclearsegment is expected to see ordering activity in FY14.

Thedefence sector has been adversely impacted by the slowpace of decision making as well as

deferral of contractawards


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3. Hydrocarbon

On the domestic front, Exploration & Production (E&P)spends in upstream hydrocarbon segment is

expected tosustain during FY14. The announcement of the recentpolicy to treat fertiliser production

on priority basiswill result in setting up new fertilizer plants. This willprovide increased

opportunities. Onshore gas processingsegment is also expected to witness implementationof

redevelopment projects. Large investments are alsoexpected in cross-country pipeline projects.

4. Thermal Power -

Policy paralysis, negative market sentiments and proceduralbottlenecks have adversely affected the

domestic Powersector in the last couple of years. Pressing concerns withrespect to land, fuel,

financing and statutory approvalshave dried up the order pipeline, putting pressure on

theCompanys capacity utilization.This is further aggravated by large scale imports sincethe

countrys policies do not provide a level playing field,particularly against imports from managed

economies

5. Power Transmission &Distribution -

Government policies lay stress on investments instrengthening the power grid and the power

distributionsystem through central and multilateral funding agencies.We have demonstrated a

steady growth in order bookposition in domestic and international markets.The emphasis on

strengthening of transmission grids inGulf countries will continue to provide significant business

opportunities for power transmission and distributionbusiness in the coming years.

6. Metallurgical and Material Handling -

The short-term outlook in this area continues to bechallenging, due to prevailing complexities of

policiesgoverning mining, land acquisition and absence ofnew power projects. These are sought to

be resolvedthrough various government proposals, legislationsand policies. As the economy grows,

demand formetals particularly steel, aluminium and copper willnecessitate expansion of capacity.

We are well positionedto benefit from the confidence we enjoy because ofour track record and

timely completion of projects.

7. Electrical & Automation -

The Electrical & Automation business continues tomaintain its leadership position in LV Switchgear.

It has alsomade a mark in the MV segment through an acquisitionof an international company a few

years ago. Productdevelopment in both LV and MV Switchgear continues toforge ahead. The project

business has enhanced its focuson international markets. The coming year should see anupward

momentum. The Company has also acquired twosmall companies which will bridge technology gaps

in case and enhance product range in another.

8. Machinery & Industrial Products -

The Construction Machinery business maintained itsleadership position in premium excavators

segmentdespite shrinkage in construction equipment marketand entry of new competitors. In

Industrial Products, thevalves business maintained the positive trend in FY13,registering a growth in


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sales of 9% over the previous year.Major investments in the oil & gas segment planned inthe USA,

Middle East and other countries provide goodopportunities for international operations.

SWOT Analysis


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Financial Statement Analysis

Ratio Analysis

To do the financial analysis for Educomp we have calculated the following ratios.

Current Ratio

The graph shows Current ratio of the company from 2007-2011. It varies from 1.19 to 1.38during

the period of study. The maximum ratio is 1.38 in the year 2006-2007 and the minimum ratio is 1.19

in the year 2008-2009. The Average Current ratio is 1.278. The Current ratio of the company is

better than its competitors

Quick ratio

The graph shows Quick ratio of the company varies from 2006-2011. It varies from 0.88 to 1.17

during the period of study. The maximum ratio is 1.17 in the year 2010-2011 and the minimum ratio

is 0.88 in the year 2008-2009. The average Quick ratio is 1.01.


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This ratio would give an indication regarding inventory position. In 2006-07, 2010-11 is more than

the normal standard of 1:1. Liquid assets are quite sufficient to provide a cover to the current

liabilities.

Absolute Liquid ratio

The graph shows Absolute liquid ratio of the company varies from 2006-2011. It varies from 0.04 to

0.12 during the period of study. The maximum ratio is 0.12 in the year 2008-2009 and the minimum

ratio is 0.04 in the year 2009-2010. The average Absolute liquid ratio is 0.076. The Absolute liquid

ratio is low because it is 0.07 whereas the accepted standard is 0.5. The company needs to improve

its short term financial positions.

Debt Equity ratio

The graph shows Debt Equity ratio of the company from 2006-2011. It varies from 0.31 to 0.53

during the period of study. The minimum ratio is 0.31 in the year 2006-2007 and the maximum ratio

is 0.53 in the year 2009-2010. The average Debt Equity ratio is 0.388. The low ratio is viewed as


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favorable from the long-term creditors point of view. It shows high margin safety to creditors. The

higher the ratio greater will be the risk involved in respect of creditors. It indicated much of

dependence on long-term debts.

Proprietary ratio

The graph shows Proprietary ratio of the company from 2006-2011. It varies from 0.34 to 0.44

during the period of study. The minimum ratio is 0.34 in the year 2007-2008 & 2009- 2011 and the

maximum ratio is 0.44 in the year 2010-2011.

The average Proprietary ratio is 0.368. Higher the ratio or the share of shareholders in the total

capital of the company better is the long-term solvency position of the company. A low proprietary

ratio will include greater risk to the creditors. During 2010-11 long-term solvency position of the

company is better.

Gross Profit ratio


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The graph shows Gross Profit ratio of the company from 2006-2011. It varies from 21.54% to 25.60%

during the period of study. The minimum ratio is 21.54% in the year 2006-2007 and the maximum

ratio is 25.60% in the year 2008-2009.

The average Gross Profit ratio is 22.91%. This ratio indicates the extent to which selling price of

goods per unit may decline without resulting in losses on operations of a firm. It reflects the

efficiency with which a firm produces its products. Higher GP ratio better is the result

Net Profit ratio

The graph shows Net Profit ratio of the company from 2006-2011. It varies from 6.91% to 11.56%

during the period of study. The minimum ratio is 6.91 % in the year 2006-2007 and the maximum

ratio is 11.56% in the year 2010-2011.

The average Net ratio is 8.648 %. This ratio is used to measure the overall profitability and hence it is

very useful to proprietors.

Operating profit ratio


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The Graph shows Operating profit ratio of the company from 2006-2011. It varies from 8.97% to

16.03% during the period of study. The minimum ratio is 8.97% in the year 2006- 2007 and the

maximum ratio is 16.03% in the year 2010-2011.

The average Operating Profit ratio is 12.16%. This Graph helps in measuring profitability and

soundness of the business. Higher the ratio is better the profitability of the concern. In 2010- 11 the

profitability of company sounds good.

Operating Ratio

The Graph shows Operating Ratio of the company from 2006-2011. It varies from 74.40% to 79.11%

during the period of study. The maximum ratio is 79.11% in the year 2006-2007 and minimum ratio

is 74.40% in the year 2007-2008. The average Operating ratio is 77.20%. This ratio indicates that

77% of the sales have consumed by the operating cost and only 23% is left to cover the interest

charge, income tax payment, dividend and the retention of profit as reserves.

Staff Expenses


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The graph shows Staff Expenses ratio of the company for 2006-2011. It varies from 5.94% to 7.16%

during the period of study. The maximum ratio is 7.16% in the year 2007-2008 and minimum ratio is

5.94% in the year 2009-2010. The average Staff Expenses ratio is 6.37%

Capital Turnover ratio

The graph shows Capital Turnover ratio of the company from 2006-2011. It varies from 1.46 to 2.37

during the period of the study. The minimum value is 1.46 in the year 2010-2011 and the maximum

value is 2.37 in the year 2006-2007. The average Capital Turnover ratio is 1.938.

Fixed Assets Turnover

The graph shows Fixed Assets Turnover ratio of the company from 2006-2011. It varies from 5.76 to

9.13 during the period of the study. The minimum value is 5.76 in the year 2010-2011 and the

maximum value is 9.13 in the year 2006-2007. The average Fixed Assets Turnover ratio is 7.218. If

the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it

means that sales are low or the investment in plant and equipment is too much. This may not be a

serious problem if the company has just made an investment in fixed asset to modernize.


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Stock Turnover ratio

The graph shows Stock Turnover ratio of the company from 2006-2011. It varies from 6.62 to 5.77

during the period of the study. The minimum value is 5.77 in the year 2010-2011 and the maximumvalue is 6.62 in the year 2006-2007. The average Stock Turnover ratio is 5.96. The Stock turnover

ratio is an important factor that controls the profitability of any businesses. It helps in determining

the liquidity of a firm. It indicates the rate at which the inventories are sold and replaced. The high

stock turnover ratio indicates the over trading and low ratio indicates the under trading. It indicates

whether the investment is within the limits or not.

Debtors Turnover ratio

The graph shows Debtors Turnover ratio of the company from 2006 -2011. It varies from 3.04 to


maximum value is 3.37 in the year 2008-2009. The average Debtors Turnover ratio is 3.246. The

higher the turnover ratio and shorter the average collection period, the better the trade credit

management and the liquidity of debtors. High turnover ratio and short collection of period imply


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prompt payment on the part of debtors. On the other hand, a low turnover ratio and long collection

period reflect the payments by debtors are delayed.

Creditors Turnover ratio

The graph shows Creditors Turnover ratio of the company from 2006-2011. It varies from 1.50 to


maximum value is 1.97 in the year 2006-2007.

The average Creditors Turnover ratio is 1.7.

MAJOR FINDINGS

Current ratio of the company has been decreased from 1.38 to 1.24 that is by 0.12 in the current

year. The Current ratio of the company is better than its competitors.

Debt equity ratio of the company has been decreased 0.53 to 0.37 in the current year.The Net profit ratio has been increased from 6.91 to 11.56 in 2006-11. There is reduction in all taxes

and expenses for the total income, that the firms good earned has the base year.

Operating profit ratio is 16.03 in the year 2010-2011, so higher the ratio is better the profitability of

the concern.

The working capital ratio has been decreased from 1.76 to 1.46. The lower ratio gives an indication

of higher investment of working capital and more profit.

The Fixed assets turnover ratio is an effective for the value of total income, has ratio is an incredible

difference for the years 2006 to 2011. The ratio has high reflects efficient value for the assets of the

firms.

The Stock Turnover ratio of the company from 2006-2011. It varies from 6.62 to 5.77 during the

period of the study. It indicates the rate at which the inventories are sold and replaced. The high

stock turnover ratio indicates the over trading and low ratio indicates the under trading.

The Debtors Turnover ratio of the company from 2006-2011. It varies from 3.04 to 3.37 during the

period of the study. High turnover ratio and short collection of period imply prompt payment on the

part of debtors.


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Cash Flow Projections

We have made the following assumptions while calculating projected cashflows for L&T till 2018 (Cash

Flows for Mar18 would be used to find the terminal value of the company).

According to the analysts and its investors as well as mentioned in its annual reports, this industry will

grow at 16%. CAGR for sales turnover has been close to 16%, however during the last couple of yearssales turnover has increased by close to 20% Y-o-Y. Based on these we have assumed that sales turnover

will increase by 16%.

OtherIncomehasbeentypically 4% of thetotalsalesandwehaveassumed thesamefor calculating other

income.

ForL&Twehaveseen thattheirexpenseshaveincreasedin thesamerateastheirSalesturnover.

Hencewehaveassumed them toincreaseby 16% Y-o-Y.

Based on projected D/E we have calculated the interests as follows

We have assumed that the depreciation of the company will increase by 16% Y-o-Y, as with increase in

sales, L&T will have increase its investments in purchase of more aircrafts, which would depreciate over

the years.

We have assumed Net Working Capital to be equal to 20% of change in sales and capital expenditure to

be equal to 25% of growth in sales.

We have taken tax rate as 30% for calculating future cashflows.

Interest

projections (L&T

plans to reduce

its D/E ratio for

future)

Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18

D/E 0.3 0.25 0.2 0.2 0.2 0.2

Equity 29,142.72 33514.128 38541.2472 38541.2472 38541.2472 38541.25

Debt 8,834.21 8378.532 7708.24944 7708.24944 7708.24944 7708.249

11% interest rate 921.63852 847.9074384 847.907438 847.907438 847.9074


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Cash flow Projections (in CR)Mar'9 Mar'10 Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18

Sales

Turnover34249.85 37187.50 44055.55 53849.48 61616.85

71475.55 82911.63 96177.49 111565.89 129416

Other

Income1612.58 2321.67 1781.28 885.32 2104.96

2859.02 3316.47 3847.10 4462.64 5176Total

Income 35862.43 39509.17 45836.83 54734.80 63721.81 74334.57 86228.10 100024.59 116028.53 134593

Total

Expenses29819.63 31363.62 38337.63 45997.94 55744.22

64663.30 75009.42 87010.93 100932.68 117081

EBDIT 6042.80 8145.55 7499.20 8736.86 7977.59 9671.27 11218.68 13013.66 15095.85 17511

Interest 770.00 995.37 1199.23 1683.31 982.40 921.64 847.91 847.91 847.91 847

Depriciation 284.83 383.65 575.81 699.46 818.47 949.43 1101.33 1277.55 1481.95 1719

EBIT 5757.97 7761.90 6923.39 8037.40 7159.12 8721.85 10117.34 11736.12 13613.90 15792

EBT 4987.97 6766.53 5724.16 6354.09 6176.72 7800.21 9269.44 10888.21 12765.99 14944

Tax 1176.19 1577.02 1858.47 1853.83 1800.50 2340.06 2780.83 3266.46 3829.80 4483

Net profit 3811.78 5189.51 3865.69 4500.26 4376.22 5460.15 6488.60 7621.75 8936.19 10460

Net workingcapital 1040.99 857.66 785.00 807.94 491.05 788.70 914.89 1061.27 1231.07 1428

Change on

working

capital -183.33 -72.66 22.94 -316.89 297.65 126.19 146.38 169.80 196

Capital

expenditure 1900.00 1572.00 1673.00 1730.00 1505.00 1971.74 2287.22 2653.17 3077.68 3570

Discount Rate Calculation

TocalculatethediscountrateforL&TwehavecalculatedWACC(weightedaveragecostof capital)forthecompany.

WACCfor thecompanyisgivenbythefollowing formula: WACC= D/V(Kd)(1-t)+E/VKe

Where

D:Debttakenbythecompany

E:Equityin thecompany

V:Total value ofthefirm (D+E)

Kd:CostofDebt

Ke:Costof Equity

T:TaxRate

Using adjusted daily stock price data between period April-2010 & April-2011, we have computed stock

beta for CAPM model. Beta of stock comes out as 1.54.

We used daily quotes of Total Return Index of NIFTY in for the purpose of evaluating market return

(Rm) over period of April 2010 & March-2013. It comes out to as 12.79% PA.


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We have used Risk-free Rate quotes from RBI records for year 2011-2012 on State-Government &

Central Government Securities. This is quotes as 8.79% PA.

Then using CAPM model, we estimated companies Return on Equity to be 15.96%.

Using company P&L and Balance-Sheet, we estimated its before-tax interest rate to be about 11%

Using company past year P&L statement, we estimated its effective tax rate to be 30%. We used market

price of equity and book price of debt (due to illiquidity of debt) to compute its debt ratio.

Using standard definition of WACC and above value of variables, we estimated its WACC to be 14.03%.

For our valuation purpose we used this WACC as our discount rate.

Valuation Methods

There are various methods that can be used to find the value of a company.

The three most commonly used techniques are:

Discounted cash flow (DCF) analysis

Multiples method

Market valuation

We have tried to value the company using Market Valuation, Discounted cash flow techniques and

Multiples Method, which is presented in the next sections respectively.

Market Valuation

Value of a company can be calculated as Price of a Share * Number of shares outstanding.

Book Value of L&T Shares = Rs. 2770

Share Price of L&T Shares = Rs. 620.15 (as on 30-June-2013)

Total number of shares = 596900000 (as on 30-June-2013)

Valuation of L&T at Book Value = Rs. 2770 * 596900000 = Rs. 165.34 Billion

Valuation of L&T at Market Price = Rs. 620.15 * 596900000 = Rs. 37.02 Billion

Discounted cash flow (DCF) analysis

The DCF analysis is the most thorough way to value a company.


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From the cash flow projections, we have calculated the Net Present Value of the Company by

discounting the future cash flows at WACC. Also, the cash flows for year 2018 are used to find out the

terminal value of the company.

The value of the terminal year cash flows can be calculated as:

CF (1+g) / (Discount Rate-g)

To find the terminal cash flows, g is taken as 6.8%.

Discount Rate is equal to WACC of the company i.e. 14.03%.

Using the above formula as well as cash flow projections, the present value of the Company can be

calculated, which is presented in the table below:

Valuation UsingDCF (In Cr)

Mar'9 Mar'10 Mar'11 Mar'12 Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 Mar'18

EBIT 5757.97 7761.90 6923.39

8037.4

0 7159.12 8721.85

10117.3

4

11736.1

2 13613.90 15792.12

Depriciatio

n 284.83 383.65 575.81 699.46 818.47 949.43 1101.33 1277.55 1481.95 1719.07

Capital

Expenditur

e 1900.00 1572.00 1673.00

1730.0

0 1505.00 1971.74 2287.22 2653.17 3077.68 3570.11

Change in

working

capital -183.33 -72.66 22.94 -316.89 297.65 126.19 146.38 169.80 196.97

Operatingcash flows 4142.80 6756.88 5898.86

6983.92 6789.48 7401.89 8805.27

10214.11 11848.37 13744.11

tax 1242.84 2027.06 1769.66

2095.1

8 2036.84 2220.57 2641.58 3064.23 3554.51 4123.23

Capital cash

flow 2899.96 4729.82 4129.20

4888.7

4 4752.64 5181.32 6163.69 7149.88 8293.86 9620.87

Discount

rate 1.00 0.88 0.77 0.67 0.59 0.52

4752.64 4543.47 4739.52 4821.03 4903.93 4988.26

14

4

129456.83

Cumulative 4752.64 9296.10

14035.6

3

18856.6

5 23760.58 153217.41

Valuation of L&T using DCF Method = Rs. 1532.17 Billion


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Sensitivity Analysis

We have modeled above calculations to calculate the valuation of the company based on the value of

growth rate.

Sensitivity Analysis

Value of gValuation inBn

5 1267.5

5.5 1329.83

6 1399.91

6.5 1479.28

7 1569.93

7.5 1674.45

8 1796.27

Since the growth rate of the company has been good, and the outlook by Analysts has been positive. We

have taken some values for growth rate and have calculated the value of the company for these possible

growth rates. The industry saw abnormally high growth rates earlier but that is not the case now. With

more and more players entering the business the industry growth has slowed down.

Multiples Method

A company can be values based on market valuation multiples such as Price by Earning multiple also

known as P/E ratios, this method, which compares a companys market capitalization to its annual

income, is the most commonly used multiple. Other multiples which can be used are Sales multiple and

EBITDA multiples. When using these methods, we need to look at which multiples for other companies

in the industry to ascertain equity value. After this we need to add debt to ascertain enterprise value.

Last

Price

Market Capitalization

(in crores)

Sales

Turnover

Net

Profit

Total

Assets

Larsen &

Toubro 724.55 66956.38 60873.26 4910.65 37976.93

BHEL 119 29126.44 48424.65 6614.73 25496.64

Adani Ports 125.95 26072.30 3361.05 1754.18 14503.28

GMR Infra 13.7 5332.64 1432.79 53.45 10952.76

We now have calculated the Sales Multiple, EBDITA Multiple &Price to Earnings Multiples ratios for

these companies and have taken an average score.


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Sales

Multiple PAT Multiple Price to earnings multiple

BHEL 1.099930906 13.63 1.14

Adani Ports 7.757188974 14.86 1.80

GMR Infra 0.009561764 3.72 0.49

Average 2.955560548 10.74 1.14

Using Sales Multiple

L&T Sales (as June 2013) =6087300000

Valuation of L&T using Sales Multiple =6087300000 * 2.96 = Rs. 18.01 Bn (Equity Value)

Using EBIDTA Multiple

L&T EBDITA (as June 2013) = 491000000

Valuation of L&T using EBDITA Multiple =491000000 * 10.74 = Rs.5.273 Bn (Equity Value)

Using PE Multiple

L&T Earnings (as June 2013) = 3797600000 * 1.14 = 43.29 Bn (Equity Value)

Valuation of L&T using PE Multiple = 3797600000 * 1.14 = 43.29 Bn (Equity Value)

Conclusion

From our analysis, we found that L&T has strong fundamentals. The company has been out-growing its

competitors since many years. This is also evident from analysts report, which forecasts L&T to grow at

28%. India, being a developing country and this industry will grow in future. Beginning from the quarter

April-June 2013, the operations of the Engineering and Construction segment, which were hitherto

reported as part of one single segment, have now been reported into different segments identified

based on internal re-structuring and to provide granular clarity on segment information.

From the sensitivity analysis we see that the market is assuming that the company will grow around 8%

which is a fair assumption to make. Hence we can conclude that it is rightly priced.

Since there are no other comparable companies present in the same sector as L&T, we have got a lot of

deviation to calculate L&Ts valuation using Multiples method.


22/22

22 | P a g e

With a healthy order book, strong balance sheet, wide ranging capabilities and international presence,

the Company is optimistic about its prospects as both the Indian and global economies work towards

their recovery

References

1. www.larsenandtoubro.com

2. www.moneycontrol.com

3. www.yahoofinance.com

4. www.investorpedia.com
http://www.larsenandtoubro.com/http://www.larsenandtoubro.com/http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.yahoofinance.com/http://www.yahoofinance.com/http://www.investorpedia.com/http://www.investorpedia.com/http://www.investorpedia.com/http://www.yahoofinance.com/http://www.moneycontrol.com/http://www.larsenandtoubro.com/

Documents

SFM_L&T_final