1. 1QFY2011Result Update |Infrastructure
July 27 2010
Larsen & Toubro NEUTRAL
CMP Rs1,863
Performance Highlights Target Price -
Y/E March (Rs cr) 1QFY11 1QFY10 4QFY10 % chg (yoy) % chg (qoq) Investment Period -
Net Sales 7,885.3 7,408.3 13,585.1 6.4 (42.0)
Stock Info
Op. Profit 1,007.1 821.9 2,050.8 22.5 (50.9)
Sector Infrastructure
Net Profit 632.2 563.0 1,360.0 12.3 (53.5)
Market Cap (Rs cr) 112,382
Source: Company, Angel Research
Beta 0.96
Larsen and Toubro (L&T) posted modest set of numbers for 1QFY2011, which
were below our expectations mainly on the top-line front. In case of order book, 52 Week High / Low 1949/1371
L&T had order backlog of Rs1,07,816cr as on June 30, 2010. Order inflow Avg. Daily Volume 327,287
during the quarter stood at Rs15,626cr led by the power segment (52%). Face Value (Rs) 2
Further, the company has maintained its guidance of 25% order inflow and
BSE Sensex 18,078
revenue growth of 20% for the entire year. At current valuations most of the
positives are factored in and hence recommend a Neutral view on the stock. Nifty 5,431
Top-line below estimates, margins positively surprise: For 1QFY2011 L&T Reuters Code LART.BO
reported modest top-line growth of 6.4% yoy to Rs7,885cr (Rs7,408cr), below Bloomberg Code LT@IN
our estimates of a ~13.9% growth, mainly on account of the disappointment in
the E&C segment, which recorded flat top-line of Rs6,644cr as against our
estimate of Rs7,213cr. However, the company reported substantial 170bp yoy Shareholding Pattern (%)
jump in EBITDA margin mainly on account of lower subcontracting expenses.
Promoters 0.0
Interest cost and depreciation were in line with expectations.
MF / Banks / Indian Fls 44.8
Outlook and Valuation: L&T has always traded at a premium to Sensex
valuations, and outperformed the Sensex consistently given its strong operating FII / NRIs / OCBs 18.9
cash flows, superior return ratios (in excess of 20%) and excellent capital Indian Public / Others 36.3
efficiency. In recent times (since our initiating coverage report), the stock has
outperformed the BSE Sensex by ~20%, which was in line with our expectations.
However, we believe that at current valuations of 27.3x FY2012E earnings of
Abs. (%) 3m 1yr 3yr
Rs68.9/share there’s limited upside to our SOTP target price of Rs1,842. Hence,
we recommend Neutral on the stock. Further, it should be noted that our target Sensex 2.2 17.6 18.7
price factors in Rs1,447/share at 21x FY2012E EPS (~20% earnings CAGR over LNT 14.7 24.3 53.6
FY2010-12E) for L&T parent and values its subsidiaries at Rs394/share.
Therefore, at the current juncture, we believe that most of the positives are
factored in and the only upside can come from value unlocking at the subsidiary
level (read finance companies), which has not been factored in by us.
Key financials (Standalone)
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 33,926 37,035 44,047 55,519
% chg 36.4 9.2 18.9 26.0
Adj. Net Profit 2,595 2,893 3,353 4,194
% chg 32.4 11.5 15.9 25.1
FDEPS (Rs) 42.6 47.5 55.1 68.9
EBITDA Margin (%) 11.4 12.9 12.2 12.1
P/E (x) 43.7 39.2 33.8 27.0 Shailesh Kanani
022-40403800 Ext:321
RoAE (%) 23.6 18.8 16.7 17.8
shailesh.kanani@angeltrade.com
RoACE (%) 22.0 19.7 17.8 19.2
P/BV (x) 9.1 6.2 5.2 4.5 Aniruddha Mate
EV/Sales (x) 3.5 3.2 2.7 2.2 022-40403800 Ext:335
EV/EBITDA (x) 31.1 25.1 22.4 18.1 aniruddha.mate@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
3. 1QFY2011 Result Update | Larsen & Toubro
Top-line below estimates, margins positively surprise: L&T reported modest top-line
growth of 6.4% yoy to Rs7,885cr (Rs7,408cr), below our estimates of ~13.9%
growth, mainly on account of the disappointment from the E&C segment, which
recorded flat top-line of Rs6,644cr as against our estimate of Rs7,213cr. This was
mainly on account of inflows being heavily back ended in FY2010, with 60% of
orders coming in 2HFY2010 and 35% in 4QFY2010. However, 6.4% yoy sales
growth is in line with the internal projections of the company and they are on track
to achieve 20% growth for the year as a whole. The company ended 1QFY2011
with an order book at Rs1,07,816, up 51% yoy. The asking rate is 18.9% yoy
(Rs71,339cr) in the remaining nine months of FY2011E to meet its order inflow
guidance of 25%.
Exhibit 3: Trend in revenues Exhibit 4: Trend in order booking
16000 50.0 35,000 160.0
14000 139.5 140.0
40.0 30,000
39.8 120.0
12000 35.0 25,000 100.0
28.1 30.0
10000 20,000 80.0
25.3 65.2 63.3
8000 20.0 60.0
15,000 47.5 40.0
6000 23.4 20.0
10.0 10,000 14.3
4000 7.3 6.4 -
3.0 5,000 (16.9)
- (21.8) (20.0)
2000
(5.7) - (40.0)
0 (10.0)
2QFY093QFY094QFY091QFY102QFY103QFY104QFY101QFY11 2QFY093QFY094QFY091QFY102QFY103QFY104QFY101QFY11
Sales (Rs cr, LHS) Growth (yoy %, RHS) Order Booking (Rs cr, LHS) Growth (yoy %, RHS)
Source: Company, Angel Research Source: Company, Angel Research
However, the company reported a phenomenal 170bp yoy jump in EBITDA margin
mainly on account of lower subcontracting expenses. Interest cost and depreciation
were in line with expectations.
Exhibit 5: Trend in EBITDA Exhibit 6: Trend in net profit
2,500.0 16.0 1600 12.0
15.0 15.1
12.3 14.0 1400 10.4
2,000.0 10.0 10.0
12.8 12.0 1200 8.8 8.0
11.2 7.6 8.0
1,500.0 10.6 10.0 1000 7.6
7.0
8.8 9.1 8.0 800 6.0 6.0
1,000.0 6.0 600
4.0
4.0 400
500.0
2.0 2.0
200
- - 0 -
2QFY093QFY094QFY091QFY102QFY103QFY104QFY101QFY11 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
EBITDA (Rs cr, LHS) EBITDAM (%, RHS) PAT (Rs cr, LHS) PATM (%, RHS)
Source: Company, Angel Research Source: Company, Angel Research
July 27 2010 3
4. 1QFY2011 Result Update | Larsen & Toubro
Strong performance at subsidiary levels
Technology subsidiary, L&T InfoTech reported an excellent performance following
the recovery in the US and Europe markets. L&T InfoTech reported 19.2% yoy and
23.6% qoq growth in revenue for 1QFY2011. On the profitability front, the
subsidiary reported an improvement, with NPM at 14.0%, indicating effective cost
controls. The financial subsidiaries registered a revival in business, and witnessed
yoy revenue growth of 44.9% in L&T Finance and 72.1% in L&T Infrastructure
Finance for 1QFY2011. L&T Finance also saw an increase in its assets to
Rs8,000cr (from Rs7,000cr in 4QFY2010), while L&T Infrastructure Finance
increased its assets to Rs4,500cr (from Rs3,800cr in 4QFY2010).
Exhibit 7: Subsidiary performance
1QFY11 1QFY10 4QFY10 % chg (yoy) % chg (qoq)
Revenues
L&T InfoTech 565.0 474.0 457.0 19.2 23.6
L&T Finance 287.0 198.0 300.0 44.9 (4.3)
L&T Infra. Finance 148.0 86.0 134.0 72.1 10.4
PAT
L&T InfoTech 79.0 61.0 90.0 29.5 (12.2)
L&T Finance 58.0 24.0 52.0 141.7 11.5
L&T Infra. Finance 48.0 22.0 35.0 118.2 37.1
Asset base
L&T Finance 8,000 5,000 7,000 60.0 14.3
L&T Infra. Finance 4,500 3,000 4,300 50.0 4.7
Source: Company, Angel Research
Order Book Analysis
L& T registered a robust order inflow of Rs15,626cr during 1QFY2011 mainly on
account of the power segment, which contributed 52% of the overall order inflow.
Orders to the tune of ~89% for the year came from the local market, taking the
company’s outstanding order book to Rs1,07,816cr. L&T’s order book is majorly
dominated by the power (33%) and infrastructure (32%) segments. Process (15%),
hydrocarbon (14%) and others (6%) form the balance part of the order book.
Exhibit 8: Quarterly sectoral order inflow trend (Rs cr) Exhibit 9: Quarterly sectoral OB composition trend (Rs cr)
12,000 120,000
10,000 100,000
8,000 80,000
6,000 60,000
4,000 40,000
2,000 20,000
- -
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
1QFY11
Process Hydrocarbon Power Infrastructure Others Process Hydrocarbon Power Infrastructure Others
Source: Company, Angel Research Source: Company, Angel Research
July 27 2010 4
5. 1QFY2011 Result Update | Larsen & Toubro
Client-wise, 40% of the outstanding order book comes from the public sector, with
47% coming from the private sector, and the balance being captive work orders.
Notably there has been a drop in the share of public sector, which management
has cited as not a concern and guided to be revived in the ensuing quarters.
Outlook and Valuation: Positives priced in at Rs1,863
The macro outlook for infrastructure in general, and the consequent benefits for
L&T in terms of order inflows in particular, remain strong. We believe that the
company will continue to occupy a unique position in the Indian engineering and
construction space as a diversified, large engineering play, with exposure to areas
ranging from power to defence to nuclear to equipment. Further, in light of higher
margins in the quarter and management guidance, we are marginally tweaking
our numbers to factor in the same.
Exhibit 10: 1QFY2011 Actual v/s Estimates
Estimates Actual Variation %
Net Sales 8,437 7,885 (6.5)
OPM (%) 10.7 12.8 207.1bp
PAT 592 632 6.8
Source: Company, Angel Research
Exhibit 11: Change in estimates
FY2011E FY2012E
Earlier Estimates Revised Estimates Variation % Earlier Estimates Revised Estimates Variation %
Revenues 44,156 44,047 (0.3) 55,744 55,519 (0.4)
EBITDA Margins 12.0 12.2 22bp 12.0 12.1 17bp
PAT 3,306 3,353 1.4 4,155 4,194 0.9
Source: Company, Angel Research
At the CMP of Rs1,863, the stock is trading at 27.0x FY2012E earnings and 4.5x
FY2012E P/BV, on a standalone basis. We have used the sum-of-the-parts (SOTP)
methodology to value the company to capture all its business initiatives and
investments/stakes in the different businesses. On SOTP basis, by ascribing
separate values to its parent business on a P/E basis and investments in
subsidiaries using the P/E, P/BV and MCap basis, we have arrived at a fair value
of Rs1,842 for L&T, which provides limited upside from current levels. Hence, we
recommend Neutral on the stock. Further, it should be noted that at our SOTP
Target Price, the stock would trade at 27.0x FY2012E standalone EPS of Rs68.9,
which would imply a premium of ~60% over Angel’s Sensex Target FY2012E P/E
multiple of 17x. This is at a nominal discount to the historical premium
commanded by L&T over the Sensex.
July 27 2010 5
6. 1QFY2011 Result Update | Larsen & Toubro
Exhibit 12: L &T - Parent historic P/E multiple premium to BSE Sensex
Source: Company, Angel Research
The historical 1-year forward P/E band shows that L&T has traded at an
average P/E of 24.9x, 28.1x and 30.5x over the past seven, five and three
year, respectively. Therefore, our SOTP target price at implied P/E multiple of
27.0x on standalone basis is again at a nominal discount to its historical
average.
It should be noted here that we believe the discount would remain given: 1)
structural change in order book with exposure to higher gestation orders; 2)
investments in future ventures – resulting in dilution of return ratios in the
medium term, and 3) the earnings growth enjoyed by the company in the past
would not be the same going ahead.
Exhibit 13: L&T - Parent 1-year forward P/E bands
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
25-Mar-04
25-Mar-05
25-Mar-06
25-Mar-07
25-Mar-08
25-Mar-09
25-Mar-10
25-Nov-03
25-Nov-04
25-Nov-05
25-Nov-06
25-Nov-07
25-Nov-08
25-Nov-09
25-Jul-03
25-Jul-04
25-Jul-05
25-Jul-06
25-Jul-07
25-Jul-08
25-Jul-09
25-Jul-10
P/E 7YEAR AVG 5YEAR AVG 3YEAR AVG
Source: Company, Angel Research
July 27 2010 6
8. 1QFY2011 Result Update | Larsen & Toubro
Investment Arguments
Proxy to India's infra story: We believe that L&T is in an enviable position, given the
apparent shortage of good quality constructors in India. It is in a position to choose
its contracts and negotiate for price variation clauses. L&T's strong balance sheet, a
sound execution engine, wide array of capabilities, integrated operations tailored
to suit India's infrastructure growth story and multiple, recurring value-unlocking
triggers over the medium term, lead us to place faith in this default India
infrastructure story. Further, L&T has an order book of >Rs1trillon, lending revenue
visibility. With signs of pick up in execution, management has guided for an
improving scenario and we also believe that most of the pieces are falling into
place for the company.
Well-capitalised balance sheet funding the expansion: L&T has a well-capitalised
balance sheet, at a debt-equity ratio of 0.3x as of FY2010, in spite of having a
strong portfolio of assets and having invested in future growth areas. We believe
that the key factors for the same are: 1) high margins, and 2) better working
capital management.
Great Infusion-Dilution opportunity: Investment in the construction segment is
expected to double over the Eleventh Plan period, and the PPP model is assuming
greater significance in delivering and meeting physical targets in the different
segments of the Infrastructure space. The government, through Regulatory
changes, is focusing on the construction segment through the PPP mode of
investment. It expects the PPP share in the Eleventh Plan to be 30%, as against a
mere 19.8% in the Tenth Plan. This has become imperative due to the widening
gap between the demand for infrastructure and financial resources available with
the government to fund the same. Given the high growth opportunities present in
L&T's varied business verticals (Infrastructure and Finance), we feel that the
company provides a great infusion-dilution opportunity. It should be noted that
such moves lead to short-term dilution in equity, leading to the EPS getting
temporarily depressed. However, such moves also shore up the net worth of the
company, which fuels its future growth. Further, it also serves as a benchmark for
valuing the entity.
July 27 2010 8
14. 1QFY2011 Result Update | Larsen & Toubro
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement L&T
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.
Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)
July 27 2010 14
