Larsen & Toubro

Result Update
Earnings Intact, Maintain ACCUMULATE

¾ Performance in Q1FY11 propelled by other income– revenue

July 27, 2010

growth at 6% yoy to Rs78.9 bn, EBITDA margins up 160 bps

ACCUMULATE yoy and net profit up 34% yoy to Rs6.7 bn
¾ Secures order worth Rs156 bn in Q1FY11 (up 63% yoy) and
Price Target Price Rs130 bn thereafter. YTD achieves 40% of FY11E order inflow
Rs1,863 Rs2,126 target i.e. upto July 2010
Sensex 18,078 ¾ Management reiterates growth guidance for FY11E - 20%
growth in revenue booking and 25% growth in order inflows
Price Performance ¾ Roll-over valuation of core business to FY06-08 average, raise
(%) 1M 3M 6M 12M SOTP target valuation from Rs1810/Share to Rs2126/Share.
Absolute 6 15 25 24 Maintain ACCUMULATE rating
Rel. to Sensex 3 13 16 6
Source: Bloomberg
Q1FY11 performance propelled by other income, net profit up 34% yoy
Led by measly 1.1% yoy growth in E&C segment to Rs66.4 bn, L&T reported subdued
revenue growth at 6.4% yoy to Rs78.9 bn. Both E&E and M&IP segment reported
Stock Details strong growth – up 29.4% yoy to Rs7.5 bn and 25.5% yoy to Rs4.4 bn respectively.
Sector Engineering & Cap Goods However, net profit growth at 34.3% yoy to Rs6.7 bn remained ahead of estimates led
by (1) 160 bps yoy improvement in EBITDA margins to 12.9% (above estimates) –
Reuters LART.BO
linked to margin expansion in E&C segment and (2) other income at Rs2.3 bn, up 63%
Bloomberg LT@IN
yoy.
Equity Capital (Rs mn) 1206
Face Value(Rs) 2 Subsidiaries performance – reports improved traction
No of shares o/s (mn) 603
¾ L&T Infotech (LTI) – LTI reported improvement in traction - revenues grew 19% yoy
52 Week H/L 1,949/1,371 (23% qoq) to Rs5.65 bn and net profits grew 27% yoy (down 4% qoq) to Rs0.79 bn.
Market Cap (Rs bn/USD mn) 1,124/24,071
¾ L&T Finance (LTF) – LTF reported (1) 48% yoy growth in business assets to Rs80
Daily Avg Volume (No of sh) 1487456
bn (2) revenues grew by 45% yoy to Rs2.87 bn and (3) net profit growth of 142% yoy
Daily Avg Turnover (US$mn) 54.1 to Rs0.58 bn.
¾ L&T Infrastructure Finance (LTIF) – LTIF reported (1) revenue growth of 72% yoy
Shareholding Pattern (%) to Rs1.48 bn (2) net profit doubled to Rs0.48 bn and (3) business assets increased
50% yoy to Rs45 bn.
J’10 M’10 D’09
Promoters 0.0 0.0 0.0
YTD, L&T has secured 40% of our FY11E order inflows
FII/NRI 18.9 18.0 20.1
Led by strong order inflow from power vertical, L&T secured orders worth Rs156 bn
Institutions 38.4 38.6 37.2
during the quarter – equivalent to 22% of FY11E inflow estimates. Since then, L&T has
Private Corp 6.4 6.3 5.8 secured order inflows of approximately Rs130 bn – totaling 40% of FY11E target order
Public 36.3 37.1 36.9 inflows. This puts L&T in comfortable position to achieve the targeted 25% growth in
Source: Capitaline order inflows for current year. L&T’s order book has increased to Rs1078 bn –
equivalent to 2.9X FY10 standalone revenues.

Consolidated Financial Snapshot Rs Mn

YE- Net EBITDA EPS EPS ROE EV/
Mar Sales (Core) (%) APAT (Rs) %Chg (%) P/E EBITDA P/BV
FY09 403,757 55,879 13.8 29,173 51.2 33.4 22.4 36.4 21.6 7.3
Pritesh Chheda, CFA FY10 449,030 66,441 14.8 34,241 56.9 11.0 18.5 32.8 18.3 5.1
pritesh.chheda@emkayglobal.com
FY11E 532,225 82,134 15.4 41,483 69.0 21.3 17.5 27.0 15.3 4.4
+91 22 6612 1273
FY12E 642,461 99,536 15.5 50,009 84.0 21.8 18.2 22.2 13.0 3.7

Prerna Jhavar
prerna.jhavar@emkayglobal.com
+91 22 6612 1337

Emkay Global Financial Services Ltd 1

 Larsen & Toubro Result Update

Maintain FY11E and FY12E earning estimates, Maintain Accumulate

L&T has reiterated its growth guidance for FY11E – 20% growth in revenue booking and
25% growth in order inflows. Management guidance aptly factors muted revenue booking in
H1FY11E followed by strong revenue booking in H2FY11E. Even, we reiterate our view that
‘All Is Well’ for L&T amidst expectation of strong order inflow and revenue booking led by
improvement in industrial capex environment and continued thrust on infrastructure
development. We maintain our consolidated earning estimates of Rs69.0/Share and
Rs84.0/Share for FY11E and FY12E. We roll over valuation of core business to FY06-08
average against FY04-08 average (rising preference for late cycle plays), hence raise
SOTP valuation from Rs1810/Share to Rs2126/Share. We maintain ‘ACCUMULATE’ rating.

Standalone Key Financials - Quarterly

Rs mn Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 YoY (%) QoQ (%)
Revenue 1,097 1,333 2,162 1,907 1,447 31.9 (24.1)
Expenditure 976 1,172 1,781 1,740 1,343 37.6 (22.8)
Consumption of RM 465 685 1,078 1,225 714 53.7 (41.7)
as % of sales 42.4 51.4 49.8 64.2 49.4
Payment to Subcontrator 255 229 299 230 348 36.5 51.1
as % of sales 23.2 17.2 13.8 12.1 24.0
Employee Cost 95 106 107 124 106 12.0 (14.5)
as % of sales 8.6 7.9 4.9 6.5 7.3
Other expenditure 162 152 298 162 175 8.2 8.2
as % of sales 14.7 11.4 13.8 8.5 12.1
EBITDA 121 161 381 167 104 (14.0) (37.4)
Depreciation 6 6 6 14 8 42.9 (40.1)
EBIT 116 155 374 153 96 (16.9) (37.2)
Other Income 3 2 1 31 40 1,058.7 31.7
Interest 18 23 25 31 24
PBT 101 133 350 153 113 11.5 (26.4)
Total Tax 36 45 121 40 37 5.3 (5.2)
Adjusted PAT 66 88 228 114 75 14.9 (33.8)
Extra ordinary items 0 0 0 -23 0 (100.0) (100.0)
Reported PAT 65 88 228 90 75 15.4 (16.8)
Adjusted EPS 6.0 8.0 20.8 10.3 6.8 14.9 (33.8)

Margins (%) (bps) (bps)

EBIDTA 11.1 12.1 17.6 8.7 7.2 (390) -150
EBIT 10.5 11.6 17.3 8.0 6.6 (390) -140
EBT 9.2 10.0 16.2 8.0 7.8 (140) -20
PAT 6.0 6.6 10.6 6.0 5.2 (80) -80
Effective Tax rate 35.2 33.9 34.7 25.8 33.2 (200) 740

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 Larsen & Toubro Result Update

Segmental performance
Rs mn Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 YoY (%) QoQ (%)
Segment Revenues
Engineering & Construction 65,729 68,541 69,980 121,094 66,438 1.1 (45.1)
Electrical & Electronics 5,759 7,088 7,214 9,883 7,451 29.4 (24.6)
Machinery & Industrial Products 4,370 5,096 5,911 6,819 5,482 25.5 (19.6)
Others 771 923 954 1,005 1,220 58.3 21.5
Less: Intersegment Revenues 1,864 1,759 2,157 1,804 960 - -
Total 74,764 79,889 81,901 136,997 79,632 6.5 (41.9)
Segment Results
Engineering & Construction 6,992 6,939 8,554 18,466 8,167 16.8 (55.8)
Electrical & Electronics 680 1,060 873 1,329 738 8.4 (44.5)
Machinery & Industrial Products 954 928 1,206 1,431 1,130 18.5 (21.0)
Others 42 176 205 20 335 697.4 1,541.7
Total 8,668 9,103 10,838 21,246 10,369 19.6 (51.2)
Add- Unall Income / (Exp) 1,028 825 668 1,916 879 - -
Less- Seg. Mgn on Capitalization 86 108 147 243 52 - -
Less- Interest Exp 1,096 1,310 1,339 1,356 1,423 29.9 5.0
PBT 8,514 8,511 10,020 21,563 9,773 14.8 (54.7)
Segment Capital Employed
Engineering & Construction 69,790 71,078 66,690 62,907 70,921 1.6 12.7
Electrical & Electronics 11,511 11,301 11,021 11,318 11,086 (3.7) (2.0)
Machinery & Industrial Products 2,943 1,935 1,761 2,240 1,761 (40.1) (21.4)
Others 2,154 1,680 1,832 2,035 2,028 (5.9) (0.4)
Unallocated 121,632 132,307 173,241 173,400 185,298 52.3 6.9
Total 208,029 218,300 254,545 251,899 271,095 30.3 7.6

Segment Margins (%) (bps) (bps)

Engineering & Construction 10.6 10.1 12.2 15.2 12.3 170 (300)
Electrical & Electronics 11.8 14.9 12.1 13.4 9.9 (190) (350)
Machinery & Industrial Products 21.8 18.2 20.4 21.0 20.6 (120) (40)
Average 11.3 11.1 12.9 15.3 12.9 160 (240)

Subsidiary’s Performance
Rs mn Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 YoY (%) QoQ (%)
L&T Infotech
Revenues 4,740 4,660 5,120 4,590 5,650 19.2 23.1
Net Profit 620 560 800 820 790 27.4 (3.7)
L&T Finance
Revenues 1,980 2,290 2,590 3,000 2,870 44.9 (4.3)
Net Profit 240 330 470 520 580 141.7 11.5
Business Assets 54 60 70 70 80 48.1 14.3
L&T Infrastructure Finance
Revenues 860 1,130 1,190 1,340 1,480 72.1 10.4
Net Profit 220 280 260 350 480 118.2 37.1
Business Assets 30 34 38 43 45 50.0 4.7

Emkay Research 27 July 2010 3

 Larsen & Toubro Result Update

Order Book Details

Rs bn Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 YoY (%) QoQ (%)
Order Backlog
Order Inflows 95.7 183.7 178.0 238.4 156.3 63.3 (34.4)
Closing Order Book 716.0 816.2 911.0 1,002.4 1,078.2 50.6 7.6
Order Book Break-up (%) (bps) (bps)
Process 16 15 15 16 15 (100) -100
Hydrocarbons 12 15 12 15 14 200 -100
Power 24 26 32 30 33 900 300
Infrastructure 39 38 35 33 32 (700.0) (100.0)
Others 9 6 6 6 6 (300.0) -
Order Inflow Break-up (%)
Process 9 7 13 18 8 (100) -1030
Hydrocarbons 12 33 3 25 7 (500) -1810
Power 30 32 54 17 52 2,200 3480
Infrastructure 38 19 25 28 25 (1,300.0) (320.0)
Others 11 6 3 9 8 (300.0) (70.0)

SOTP Valuation
Business Basis Multiple (X) Value (Rs bn) Value (Rs/Share)
Core Business Value PER 25.0 1,040 1716
IT Business MCap/Sale 1.5 36 59
Finance Business PBV 1.5 30 49
Infra & Property Business 45 74
LNT FZE PCE 2.0 29 49
Power Business PBV 4.0 12 20
Other Subsidaries Business PBV 2.0 34 56
Associate Business PE 15.0 13 21
Other Investments 18 30
Net Cash 34 53
SOTP Value 1,289 2126

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 Larsen & Toubro Result Update

Key Financials (Consolidated)

Income Statement Balance Sheet
Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E
Net Sales 403,757 449,030 532,225 642,461 Equity share capital 3,896 3,933 3,937 3,937
Growth (%) 37.9 11.2 18.5 20.7 Reserves & surplus 135,981 206,152 242,129 285,522
Expenditure 347,877 382,589 450,091 542,924 Net worth 139,877 210,085 246,066 289,459
Materials Consumed 258,319 287,285 340,512 411,040 Minority Interest 10,586 11,034 11,530 12,045
Employee Cost 26,664 29,654 35,148 42,428 Secured Loans 104,949 104,949 104,949 104,949
Manufacturing Exp 18,172 20,210 23,954 28,915 Unsecured Loans 79,050 117,681 156,633 202,090
Other Exp 44,722 45,441 50,477 60,542 Loan Funds 184,000 222,630 261,583 307,040
EBITDA 55,879 66,441 82,134 99,536 Net deferred tax liability 1,308 1,308 1,308 1,308
Growth (%) 39.3 18.9 23.6 21.2 Total Liabilities 335,771 445,057 520,488 609,853
EBITDA margin (%) 13.8 14.8 15.4 15.5
Depreciation 7,283 12,033 18,131 25,654 Gross Block 124,620 150,763 176,882 203,063
EBIT 48,596 54,408 64,003 73,882 Less: Depreciation 30,497 42,530 60,661 86,315
EBIT margin (%) 12.0 12.1 12.0 11.5 Net block 94,123 108,233 116,221 116,748
Other Income -555 2,146 4,308 8,261 Capital work in progress 61,769 61,769 61,769 61,769
Interest expenses 4,620 5,589 6,567 7,709 Investment 68,054 69,641 78,370 96,700
PBT 43,422 50,965 61,743 74,435 Current Assets 340,078 407,827 489,922 592,127
Tax 14,249 16,724 20,261 24,425 Inventories 71,058 79,923 109,312 149,555
Effective tax rate (%) 32.8 32.8 32.8 32.8 Sundry debtors 116,435 110,861 131,400 158,616
Adjusted PAT 29,173 34,241 41,483 50,009 Cash & bank balance 14,590 78,916 85,490 86,327
Growth (%) 33.2 17.4 21.1 20.6 Loans & advances 137,995 138,127 163,719 197,629
Net Margin (%) 7.2 7.6 7.8 7.8 Other current assets 0 0 0 0
(Profit)/loss from JVs/Ass/MI 815 104 336 905 Current lia & Prov 228,256 202,415 225,797 257,494
Adjusted PAT After JVs/Ass/MI 29,988 34,344 41,818 50,914 Current liabilities 195,082 171,874 189,867 214,154
E/O items 7,906 12,782 - - Provisions 33,174 30,541 35,930 43,340
Reported PAT 37,895 47,126 41,818 50,914 Net current assets 111,822 205,411 264,125 334,633
Growth (%) 33.7 14.5 21.8 21.8 Misc. exp 2.8 2.8 2.8 2.8
Total Assets 335,771 445,057 520,488 609,853

Cash Flow Key Ratios

Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E Y/E, Mar FY09 FY10 FY11E FY12E
PBT (Ex-Other income) 43,603 50,965 61,743 74,435 Profitability (%)
Depreciation 7,283 12,033 18,131 25,654 EBITDA Margin 13.8 14.8 15.4 15.5
Interest Provided 4,620 5,589 6,567 7,709 Net Margin 7.2 7.6 7.8 7.8
Other Non-Cash items 3,827 12,886 336 905 ROCE 16.8 14.5 14.2 14.6
Chg in working cap -39,256 -29,265 -52,139 -69,672 ROE 22.4 18.5 17.5 18.2
Tax paid -11,503 -16,724 -20,261 -24,425 RoIC 25.4 23.2 21.7 20.2
Operating Cashflow 8,575 35,485 14,377 14,605 Per Share Data (Rs)
Capital expenditure -53,805 -26,143 -26,119 -26,181 EPS 51.2 56.9 69.0 84.0
Free Cash Flow -45,230 9,342 -11,742 -11,576 CEPS 65.0 75.5 94.3 117.7
Other income 0 0 0 0 BVPS 256.9 366.1 425.0 497.4
Investments -1,299 -1,587 -8,729 -18,330 DPS 10.5 12.6 13.9 16.6
Investing Cashflow -1,299 -1,587 -8,729 -18,330 Valuations (x)
Equity Capital Raised 230.4 30692 2565 2561 PER 36.4 32.8 27.0 22.2
Loans Taken / (Repaid) 53,533 38,631 38,953 45,457 P/CEPS 28.7 24.7 19.8 15.8
Interest Paid -4,620 -5,589 -6,567 -7,709 P/BV 7.3 5.1 4.4 3.7
Dividend paid (incl tax) -5,093 -7,611 -8,402 -10,082 EV / Sales 3.0 2.7 2.4 2.0
Income from investments 0 1 2 3 EV / EBITDA 21.6 18.3 15.3 13.0
Others 1461.5 448 496 515 Dividend Yield (%) 0.6 0.7 0.7 0.9
Financing Cashflow 45,512 56,572 27,047 30,745 Gearing Ratio (x)
Net chg in cash -1,017 64,326 6,577 839 Net Debt/ Equity 0.8 0.4 0.5 0.6
Opening cash position 15,608 14,590 78,916 85,490 Net Debt/EBIDTA 2.0 1.3 1.4 1.6
Closing cash position 14,590 78,916 85,490 86,327 Working Cap Cycle (days) 95.5 128.9 161.0 170.1

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 Larsen & Toubro Result Update

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Emkay Research 27 July 2010 6