Larsen & Toubro Limited (L&T) is an Indian engineering conglomerate engaged in engineering, construction, and manufacturing. The document provides an overview of L&T and the engineering industry in India. It summarizes L&T's financial performance and position, highlighting strong revenue and order inflow growth. Calculations include projected financial statements, weighted average cost of capital, discounted cash flow valuation, and target price of Rs. 2,413.60 per share for L&T.
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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.
• Approximately 15-20 %growth rate in industry expected (LNT growing @ 25%)
• 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.
• 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.
• Industry margins growing @ 12-15%
• Industry profitability approximately 10-14%
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 with a strong
revenue growth of 25% and order inflow growth of 15-20% in FY2012.
• 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. Firm's competitive position:
• Impact on margins:
• EBITDA margin stable at 15.2% and strong inflows of Rs 303 bn.
• Capital Investment Requirement:
• L&T reported a strong balance sheet at the end FY 2011 with a marginal deterioration in working
capita levels & gross debt to equity of 0.33X.
• L&T increased its investments in its subsidiaries and associates by 29.6bn to 106.4 bn at end
FY2011 from FY2010-end level of Rs. 77bn primarily led by(1) buy out of PE stake in L&T
IDPL and investment in other development projects of Rs. 10.7 bn
• (2) Increase in investment in L&T finance and L&T infrastructure finance by Rs. 6.8 bn. (3)
Increase in investment in L&T power development to the tune of about Rs. 4.6 bn.
• Growth Rates:
• Management guided for strong revenue (25%) and inflows (15-20%) growth in FY2012 end.
• Our estimates build a marginal order inflow growth of 3% and strong revenue growth of 24% for
FY2012 end.
10. WACC-Target Price
Cost of Equity Using CAPM Model
Rf 8.24% 10 year Benchmark Gsec Yield
Rm 15% Expected Market Return
β 1.1128
R Equity 15.76%
10 Year Benchmark G Sec Yield 8.24%
AAA Corporate Bond Spread 1.23%
Tax Rate 30.00%
Total Debt (2011) 83241.2
Total Equity (2011) 10,56,970 Market Capitalisation as on 24th June
WACC 15.10%
11. • Terminal Value at the end of FY 2016
• Assumption: Free cash flow growth falls to 10% after 2016 and remains constant thereafter
forever
• G FCF 10%
• R WACC 15.10%
• Terminal Value (Rs. Mn) 24,60,286
• Enterprise Value (Rs Mn) 15,43,718
• Value of Equity (Rs. Mn.) 14,60,710
• Estimated Price (Rs) 2,413.60