Financial Ratio Analysis on L&T and Engineering Industry

1. FINANCIAL RATIO ANALYSIS
OF LARSEN & TOUBRO
LIMITED
INDUSTRY: ENGINEERING
Presented By:
Jitendra Kumar

2. INDUSTRY OVERVIEW
• The Engineering sector is the largest in the overall industrial sectors in India.
• It is a diverse industry with a number of segments, and can be broadly categorized into two
segments, namely, heavy engineering and light engineering..
• Most of the leading players are engaged in the production of heavy engineering goods and
mainly produces high-value products using high-end technology. Requirement of high level
of capital investment poses as a major entry barrier. Consequently, the small and
unorganized firms have a small market presence.
• Leading players in this industry are L&T, ABB, BHEL, Siemens, Thermax, Crompton
Greaves, Voltas
• The light engineering goods segment, on the other hand, uses medium to low-end
technology. Entry barrier is low on account of the comparatively lower requirement of
capital and technology.
• The demand in the engineering sector to remain to be healthy primarily on account of the
Government’s increased thrust on infrastructure development.

3. COMPANY OVERVIEW
• Larsen & Toubro Limited (L&T) is a technology, engineering, power, construction and
manufacturing company.
• It is one of the largest and most respected companies in India's private sector.
• Leadership position in all its major lines of business.
• L&T has an international presence, with a global spread of offices and factories. Has
strong footprint in the Gulf and in China.
Subsidiaries
• Larsen & Toubro Komatsu Limited
• Larsen & Toubro Finance
• Larsen & Toubro Infrastructure Finance
• L&T – Integrated Engineering Services (IES)
• Larsen & Toubro Valves Business Group

4. Year
Mar
10(12)
Normalised
(Mar 10)
Mar
09(12)
Normalised
(Mar 09)
Mar
08(12)
Normalised
(Mar 08)
INCOME :
Sales Turnover 37,330.51 96.22% 34,301.40 95.96% 25,314.69 96.35%
Excise Duty 317.31 0.82% 393.31 1.10% 334.38 1.27%
Net Sales 37,013.20 95.40% 33,908.09 94.85% 24,980.31 95.07%
Other Income 2,185.75 5.63% 1,734.13 4.85% 547.89 2.09%
Stock Adjustments -402.54 -1.04% 105.11 0.29% 746.17 2.84%
Total Income 38,796.41 100.00% 35,747.33 100.00% 26,274.37 100.00%
EXPENDITURE :
Raw Materials 15,854.40 40.87% 16,177.17 45.25% 13,009.51 49.51%
Power & Fuel Cost 365.36 0.94% 483.3 1.35% 365.25 1.39%
Employee Cost 2,310.49 5.96% 1,918.00 5.37% 1,497.43 5.70%
Other Manufacturing Expenses 10,716.09 27.62% 8,836.89 24.72% 5,975.49 22.74%
Selling and Administration Expenses 2,088.32 5.38% 1,941.26 5.43% 1,547.57 5.89%
Miscellaneous Expenses 462.99 1.19% 943.18 2.64% 366.74 1.40%
Less: Pre-operative Expenses Capitalised 36.25 0.09% 24.48 0.07% 11.42 0.04%
Total Expenditure 31,761.40 81.87% 30,275.32 84.69% 22,750.57 86.59%
Operating Profit 7,035.01 18.13% 5,472.01 15.31% 3,523.80 13.41%
Interest 637.67 1.64% 477.68 1.34% 173.62 0.66%
Gross Profit 6,397.34 16.49% 4,994.33 13.97% 3,350.18 12.75%
Depreciation 383.65 0.99% 284.83 0.80% 195.94 0.75%
Profit Before Tax 6,013.69 15.50% 4,709.50 13.17% 3,154.24 12.01%
Tax 1,651.56 4.26% 1,217.60 3.41% 891.56 3.39%
Fringe Benefit tax -10.01 -0.03% -0.2 0.00% 69.31 0.26%
Deferred Tax -3.38 -0.01% 10.44 0.03% 19.95 0.08%
Reported Net Profit 4,375.52 11.28% 3,481.66 9.74% 2,173.42 8.27%
Extraordinary Items 1,060.67 2.73% 850.25 2.38% 115.29 0.44%
Adjusted Net Profit 3,314.85 8.54% 2,631.41 7.36% 2,058.13 7.83%
Adjst. below Net Profit -0.35 0.00% -0.05 0.00% -0.11 0.00%
P & L Balance brought forward 100.5 0.26% 104.31 0.29% 78.24 0.30%
Statutory Appropriations 0 0.00% 0 0.00% 0 0.00%
Appropriations 4,368.38 11.26% 3,485.42 9.75% 2,147.24 8.17%
P & L Balance carried down 107.29 0.28% 100.5 0.28% 104.31 0.40%
Dividend 752.75 1.94% 614.97 1.72% 495.32 1.89%
Preference Dividend 0 0.00% 0 0.00% 0 0.00%
Equity Dividend % 625 1.61% 525 1.47% 850 3.24%
Earnings Per Share-Unit Curr 70.83 0.18% 57.71 0.16% 71.73 0.27%
Earnings Per Share(Adj)-Unit Curr 0.00% 0.00% 0.00%
Book Value-Unit Curr 303.28 0.78% 212.31 0.59% 325.95 1.24%
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SUMMARY PROFIT & LOSS
ACCOUNT

5. SUMMARY BALANCE SHEET(Rs in Crs)
Year Mar 10
Normalised
Mar 10 Mar 09
Normalised
Mar 09 Mar 08
Normalised
Mar 08
SOURCES OF FUNDS :
Share Capital 120.44 0.48% 117.14 0.62% 58.47 0.45%
Reserves Total 18,166.11 72.34% 12,342.55 64.91% 9,496.61 72.28%
Equity Share Warrants 0 0 0
Equity Application Money 25.09 0 0
Total Shareholders Funds 18,311.64 72.92% 12,459.69 65.52% 9,555.08 72.72%
Secured Loans 955.73 3.81% 1,102.38 5.80% 308.53 2.35%
Unsecured Loans 5,845.10 23.28% 5,453.65 28.68% 3,275.42 24.93%
Total Debt 6,800.83 27.08% 6,556.03 34.48% 3,583.95 27.28%
Total Liabilities 25,112.47 100% 19,015.72 100.00% 13,139.03 100%
APPLICATION OF FUNDS :
Gross Block 7,290.09 27.77% 5,590.50 28.49% 4,205.75 31.05%
Less : Accumulated Depreciation 1,788.53 6.81% 1,466.18 7.47% 1,279.58 9.45%
Less:Impairment of Assets 6.93 0.03% 6.93 0.04% 6.93 0.05%
Net Block 5,494.63 20.93% 4,117.39 20.98% 2,919.24 21.55%
Lease Adjustment -3.07 -0.01% -3.07 -0.02% -3.07 -0.02%
Capital Work in Progress 874.2 3.33% 1,080.28 5.51% 729.27 5.38%
Investments 13,705.35 52.20% 8,263.72 42.11% 6,922.26 51.11%
Current Assets, Loans & Advances
Inventories 7,723.44 29.42% 5,805.05 29.58% 4,305.91 31.79%
Sundry Debtors 11,163.70 42.52% 9,903.13 50.47% 7,365.01 54.38%
Cash and Bank 1,431.87 5.45% 775.29 3.95% 964.46 7.12%
Loans and Advances 6,042.60 23.02% 5,840.92 29.77% 3,771.40 27.84%
Total Current Assets 26,361.61 100.41% 22,324.39 113.77% 16,406.78 121.13%
Less : Current Liabilities and Provisions
Current Liabilities 19,054.50 72.58% 14,776.15 75.30% 11,741.72 86.69%
Provisions 2,188.36 8.34% 1,942.63 9.90% 2,035.42 15.03%
Total Current Liabilities 21,242.86 80.91% 16,718.78 85.20% 13,777.14 101.72%
Net Current Assets 5,118.75 19.50% 5,605.61 28.57% 2,629.64 19.41%
Miscellaneous Expenses not written off 0 0.00% 0.26 0.00% 3.06 0.02%
Deferred Tax Assets 311.88 1.19% 386.69 1.97% 182.96 1.35%
Deferred Tax Liability 389.27 1.48% 435.16 2.22% 244.33 1.80%
Net Deferred Tax -77.39 -0.29% -48.47 -0.25% -61.37 -0.45%
Total Assets 25,112.47 95.65% 19,015.72 96.91% 13,139.03 97.01%
Contingent Liabilities 1,141.10 4.35% 606.88 3.09% 405.35 2.99%
Net Total Assets 26,253.57 100% 19,622.60 100.00% 13,544.38 100%
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6. COMPUTATION OF RATIOS (1/2)
Ratios Mar-10 Mar-09 Mar-08 Observations
Leverage Ratios
Long Term Debt/Equity 0.371 0.526 0.375
Debt equity ratio has
remained constant except
for the minor jump in 2008-
09. Well within comfort
range
Debt/Equity 1.371 1.526 1.375
Debt equity ratio has
remained constant except
for the minor jump in 2008-
09. Well within comfort
range
Interest Coverage Ratio 11.03 11.46 20.3
Although the interest
coverage ratio has fallen by
46% it is still extremely
comfortable
DSCR 4.51 6.87 13.98
Extremely high compared
to industry norms
Turnover Ratios
Fixed Asset Turnover Ratio 5.21 6.36 6.019
The ratio is high by industry
standards. However, after
looking at the depreciation
numbers it appears that the
assets are growing old
Inventory Turnover Ratio 4.16 5.26 5.33

7. COMPUTATION OF RATIOS (2/2)
Ratios Mar-10 Mar-09 Mar-08 Observations
Liquidity Ratios
Current Ratio 1.24 1.34 1.19 Meets lenders requirement
Acid Test Coverage Ratio 0.98 1.12 1.03 Meets lenders requirement
Average Collection Period
Ratio 102.99 91.87 53.18
This is a worrying trend.
The sales collection number
has almost doubled over the
3 years
Return Ratios
Gross Profit Margin 17.28 14.73 13.41
Almost a 400% rise in gross
profits
Net Profit Margin 11.82 10.27 8.7 Very healthy rise in NPM
Return on Investment 26% 27% 25%
Return on Equity 23.90% 27.90% 22.70%
Very high return on
investment. Justifies the
premium valuation the
company enjoys
Price To Earnings Ratio 27.65 34.65 56.25

8. OBSERVATIONS
• Other income has jumped from 547 cr to 2185 cr
• Interest cost has risen 268%
• Dividend payout ratio has fallen 850% to 625%
• Bonus shares issued in the ratio of 1 : 1 in 2008 – 2009
• 115% rise in net current assets
• Debt service coverage ratio has fallen by 67% over the last 3 years. The view is that the
company was conservative when the times were bad and they aggressively ramped up
business when the business environment improves
• Collection period has gone up dramatically by 94% over 3 year period
• GPM has improved by almost 400 basis points
• NPM has increased by more than 300 basis points