4QFY2016 Result Update | Infrastructure

May 27, 2016

Larsen & Toubro

BUY

CMP

`1,475

Performance Highlights

Target Price

`1,700

Quarterly highlights - Standalone

Investment Period

12 Months

Y/E March (` cr)

4QFY16 3QFY16 4QFY15

% chg (yoy)

% chg (qoq)

Net sales

21,061

14,774

18,968

11.0

42.6

EBITDA

3,193

1,002

2,491

28.2

218.7

Stock Info

Adj. PAT

2,616

791

1,875

39.5

230.7

Source: Company, Angel Research

Sector

Infrastructure

Standalone numbers impress: For 4QFY2016, Larsen & Toubro (L&T) reported

Market Cap (` cr)

137,404

an 11% yoy increase in the top-line to `21,061cr, which is slightly lower than

Net debt (` cr)

11,927

our expectation. Revenue growth on a yoy basis reflects an 11.7%/ 33.3%

Beta

1.3

increase in Infrastructure/ Power segment. EBITDA for the quarter came in

higher than our expectation at `3,193cr. With some of the projects attaining

52 Week High / Low

1,887 /1,017

revenue recognition threshold level, EBITDA margins expanded 203bp yoy to

Avg. Daily Volume

2,283,576

15.2%. This is the first quarter after three successive quarters where the

Face Value (`)

company reported yoy increase in its EBITDA margin. Further, the PAT at

`2,539cr has come in ahead of our estimate. On adjusting for gains on

BSE Sensex

26,654

divestment of stake in the Foundry business (`48.5cr) and provision for

Nifty

8,157

impairment on the value of investment (`135cr), Adjusted PAT stood at

Reuters Code

LART.BO

`2,616cr. Adj. PAT margin improved 254bps yoy to 12.4% in 4QFY2016.

Bloomberg Code

LT@IN

Order inflows for consolidated entity in FY2016 declined 9.0% yoy to `43,334cr.

The order backlog stands at `2,49,949cr, thereby giving revenue visibility for

over the next 10 quarters.

Shareholding Pattern (%)

Hydro-carbon business reports minimal losses: With completion of legacy

Promoters

projects in the international business, strong execution from ongoing projects

helped the Hydro-carbon segment report 10.9% yoy increase in revenues to

MF / Banks / Indian Fls

39.1

`2,479cr. For the quarter, the segment reported an EBIT level loss of `92cr vs a

FII / NRIs / OCBs

16.6

loss of `209cr in the corresponding quarter a year ago.

Indian Public / Others

44.4

Key positives: More clarity on ongoing asset divestments, IDPL restructuring,

completion of Hydro-carbon legacy projects; net WC cycle at 24% of sales.

Abs. (%)

1yr

3yr

Key Negatives: Miss on FY2016 order inflow guidance.

Sensex

15.9

(4.1)

32.2

Outlook and valuation: L&T’s diversified presence and an anticipated recovery in

the capex cycle coupled with the company’s strong balance sheet comfort us that

36.6

(9.5)

52.0

it is well positioned to benefit from a revival in the award activity environment.

With order backlog expected to grow, execution should pick-up gradually. We

have valued the company using the sum-of-the-parts (SoTP) methodology to

3-year price chart

capture the value of all its businesses and investments. Ascribing separate values

2,000

to its parent business (on a P/E basis) and investments in subsidiaries (using P/E,

P/BV and M-cap basis), we arrive at FY2017E based target price of `1,700. We

1,500

are of the view that L&T is a good proxy play for investors wanting to ride on the

1,000

revival of the Indian infrastructure growth story. Given the 15.3% upside potential

in the stock from the current levels, we upgrade to BUY rating on the stock.

500

Key financials (Standalone)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

Net Sales

51,611

56,599

57,017

59,780

67,665

77,249

% chg

9.7

0.7

4.8

13.2

14.2

Net Profit

4,385

5,493

5,056

4,191

5,380

6,685

Source: Company, Angel Research

% chg

25.3

(8.0)

(17.1)

28.4

24.3

EBITDA (%)

10.6

11.8

11.4

10.3

10.7

11.5

EPS (`)

P/E (x)

27.9

25.0

27.3

26.1

25.7

20.7

P/BV (x)

3.2

3.0

2.7

2.5

2.4

2.2

RoE (%)

14.2

15.6

13.3

15.1

12.6

14.3

Yellapu Santosh

RoCE (%)

17.5

18.7

16.3

14.5

15.6

17.6

EV/Sales (x)

2.5

2.6

2.5

2.2

1.9

022 - 3935 7800 Ext: 6811

EV/EBITDA (x)

23.8

21.9

22.9

24.1

20.7

16.6

[email protected]

Source: Company, Angel Research; Note: CMP as of May 27, 2016

Please refer to important disclosures at the end of this report

Larsen & Toubro | 4QFY2016 Result Update

Exhibit 1: Quarterly Performance (Standalone)

Particulars (` cr)

4QFY16

3QFY16

% chg (qoq)

4QFY15

% chg (yoy)

FY16

FY15

% chg

Net Sales

21,061

14,774

42.6

18,968

11.0

59,780

57,017

4.8

Total Expenditure

17,868

13,772

29.7

16,477

8.4

53,609

50,529

6.1

Operating Expenses

16,213

11,819

37.2

14,799

9.6

46,629

44,380

5.1

Employee benefits Expense

1,037

1,200

(13.5)

1,022

1.5

4,480

4,162

7.6

Sales, Admin & Other Expenses

618

753

(18.0)

656

(5.9)

2,500

1,986

25.9

EBITDA

3,193

1,002

218.7

2,491

28.2

6,171

6,488

(4.9)

EBIDTA %

15.2

6.8

13.1

10.3

11.4

Depreciation

255

244

4.1

246

3.5

999

1,008

(0.9)

EBIT

2,939

757

287.9

2,245

30.9

5,172

5,480

(5.6)

Interest and Financial Charges

397

381

4.2

335

18.7

1,449

1,420

2.1

Other Income

737

617

19.4

570

29.2

2,406

2,283

5.4

PBT before Exceptional Items

3,278

993

230.0

2,480

32.2

6,129

6,344

(3.4)

Exceptional Items

(92)

(186)

(560)

(357)

PBT after Exceptional Items

3,201

1,085

195.0

2,666

20.1

6,689

6,701

(0.2)

Tax

662

202

227.2

605

9.3

1,378

1,645

(16.3)

% of PBT

20.7

18.6

22.7

20.6

24.5

PAT

2,539

883

187.6

2,061

23.2

5,311

5,056

5.0

Adj. PAT (for excep. Items)

2,616

791

230.7

1,875

39.5

4,751

4,699

1.1

Adj. PAT %

12.4

5.4

9.9

7.9

8.2

Dil. EPS

27.08

9.44

186.9

21.95

23.4

56.80

54.10

5.0

Source: Company, Angel Research

Standalone business

Revenues grew 11% yoy

For the quarter L&T reported an 11% yoy increase in the top-line to `21,061cr,

which is slightly lower than our expectation. Revenue growth on a yoy basis reflects

an 11.7% increase in the Infrastructure segment and a 33.3% increase in the

Power segment. Revenue growth across the Infrastructure segment was owing to

some of the projects awarded in 4QFY2015 reaching the threshold of revenue

recognition. Within the Infra segment, the Transportation Infra, Heavy Civil and

Waters businesses contributed to the revenue growth. Surge in Power segment

revenue is on account of substantial progress seen across coal and gas based

projects under execution. Lower opening order book and slow execution led to

2.2% and 6.1% yoy revenue de-growth across Metallurgical & Material Handling

(MMH) and Electrical & Automation (E&A) segments, respectively.

For the full year FY2016, a strong 44.7% and 3.7% yoy increase in revenue

booking across Power (10.7% of FY2016 revenue) and Infrastructure (69.8% of

FY2016 revenue) segments led the company to report a 4.8% yoy increase in

revenue to `59,780cr.

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Exhibit 2: Segment-wise Gross Revenue Split (Standalone)

Particulars (` cr)

4QFY16

3QFY16

% chg (qoq) 4QFY15

% chg (yoy)

FY16

FY15

% chg

Infrastructure

15,949

9,785

63.0

14,278

11.7

42,175

40,652

3.7

Power

1,901

2,107

(9.8)

1,425

33.3

6,451

4,459

44.7

Metallurgical & Material Handling

905

678

33.4

925

(2.2)

2,756

3,303

(16.5)

Heavy Engineering

946

826

14.6

939

0.8

2,935

3,299

(11.0)

Electrical & Automation

1,236

1,085

13.9

1,316

(6.1)

4,228

4,129

2.4

Others

779

791

(1.5)

742

5.0

3,155

2,828

11.6

Less: Inter-segment Revenues

483

327

47.7

479

1.0

1,286

1,112

15.6

Gross Segmental Revenues

21,232

14,944

42.1

19,146

10.9

60,415

57,558

5.0

Source: Company, Angel Research

Exhibit 3: Segment-wise Unadj. EBIT & EBIT Margins (Standalone)

Particulars (` cr)

4QFY16

3QFY16

% chg (qoq)

4QFY15

% chg (yoy)

FY16

FY15

% chg

Infrastructure

2,757

833

230.9

1,958

40.8

5,037

4,443

13.4

EBIT Margin (%)

17.3

8.5

13.7

11.9

10.9

Power

(37.7)

(4.7)

231

201

14.9

EBIT Margin (%)

2.6

3.8

3.6

4.5

Metallurgical & Material Handling

(24)

nmf

34.9

239

(82.2)

EBIT Margin (%)

9.1

(3.6)

6.6

1.5

7.2

Heavy Engineering

(10)

(17)

nmf

111

nmf

(75)

336

Nmf

EBIT Margin (%)

(1.0)

(2.1)

11.8

(2.5)

10.2

Electrical & Automation

179

122

47.2

196

(8.9)

501

504

(0.6)

EBIT Margin (%)

14.5

11.2

14.9

11.8

12.2

Others

103

136

(24.0)

100

3.4

556

653

(14.9)

EBIT Margin (%)

13.2

17.2

13.4

17.6

23.1

Segmental EBIT (unadj.)

3,160

1,129

180.0

2,477

27.6

6,293

6,377

(1.3)

Source: Company, Angel Research; Note- nmf- Not Meaningful

EBITDA margins expand yoy to 15.2%

The company reported higher than expected EBITDA for the quarter at `3,193cr.

With some additional projects attaining the threshold of revenue recognition, L&T

reported a 203bp yoy EBITDA margin expansion to 15.2%. This is the first quarter

after three successive quarters where L&T has been able to report a yoy increase in

its EBITDA margin. Top-line growth coupled with (a) 5.9% yoy decrease in sales,

administrative and other (SAO) expenses (to `618cr), and (b) just a 1.5% yoy

increase in employee expenses (to `1,037cr) led to an expansion in the EBITDA

margin on a yoy basis.

At the segment level, EBIT margins expanded on a yoy basis across the

Infrastructure (up 357bp to 17.3%) and the MMH segment (up 249bp to 9.1%)

while the Heavy Engineering segment reported negative margin on account of cost

provisions and under recoveries.

For FY2016, higher operating, SAO, and employee expenses led to a 106bps yoy

decline in the company’s EBITDA margin to 10.3%. Barring the Infrastructure

segment, all other segments reported yoy declines in their EBIT margins (Heavy

Engineering reported negative margins).

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Exhibit 4: EBITDA margin expands to 15.2%

Exhibit 5: Adj. PAT margin expands yoy to 12.4%

3,500

16.0

3,000

14.0

15.2

12.4

13.1

3,000

14.0

12.0

2,500

9.9

10.5

12.0

2,500

10.0

9.1

2,000

10.0

6.5

2,000

7.6

7.1

8.0

6.8

8.0

1,500

5.4

1,500

4.9

6.0

1,000

4.0

500

2.0

0.0

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

EBITDA (`cr, LHS)

EBITDAM (%, RHS)

Adj. PAT (` cr, LHS)

Adj. PATM (%, RHS)

Source: Company, Angel Research

Adj. PAT numbers report strong yoy growth

L&T reported a PAT of `2,539cr for the quarter, ahead of our estimate. On

adjusting for gains on divestment of stake in the Foundry business (`48.5cr) and

provision for impairment on the value of investment (`135cr), the Adjusted PAT

stood at `2,616cr. The Adj. PAT margin improved from 9.9% a year ago to 12.4%

in 4QFY2016. The 39.5% yoy increase in Adj. PAT for the quarter is on account of

28.2% increase in EBITDA, 29.2% increase in other income (to `737cr) and a

lower tax rate.

For the full year FY2016, in-line with EBITDA margin, the Adj. PAT margin also

compressed yoy from 8.2% in FY2015 to 7.9% in FY2016.

Hydro-Carbon business comes out of Legacy projects

At the backdrop of stronger execution, the Hydro-carbon business reported a

10.9% yoy increase in revenue to `2,479cr.

Exhibit 6: Hydro-carbon - Quarterly Revenues & EBIT

3,000

100

2,500

(2)

2,000

(54)

(50)

(92)

1,500

(100)

(137)

1,000

(209)

(150)

500

(200)

(250)

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

Revenue (` cr, LHS)

EBIT (` cr, RHS)

Source: Company, Angel Research

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

The Hydro-carbon business reported `92cr of EBIT level losses for the quarter (vs

`209cr loss in the corresponding period a year ago). The reduction in losses is

owing to higher provisioning and completion of legacy projects in the Middle East.

For FY2016, the Hydro-carbons segment reported a 20% yoy increase in revenues

to `8,787cr, reflecting strong execution (47% of the sales were from International

subsidiaries).

Whereas, EBIT level loss margins declined from -18.1% in FY2015 to -0.2% in

FY2016, owing to close-out costs in international projects and under recovery in

fabrication yards.

IT & Technology Services business reports strong growth

L&T’s IT & Technology Services business reported an impressive 13.0% yoy

increase in revenue for the quarter to `2,295cr. The top-line growth was driven by

growth across sectors such as BFSI, autos, industrial products, and process

engineering. On the operating front, the EBIT margin declined by 64bp yoy to

18.2%.

For FY2016, the segment reported an 18% yoy increase in revenue to `8,956cr.

Similarly, higher manpower utilization and a weaker rupee helped the IT &

Technology Services segment report EBIT margin expansion to 18.6% (in FY2016;

vs 17.2% in FY2015).

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Consolidated Business Performance

Revenue grew 18.3% yoy

L&T reported an 18.3% yoy and 28.4% qoq growth in its consolidated business’

top-line to `33,157cr. Revenue growth on a yoy basis reflects (1) strong execution

across Infrastructure segment (19% yoy revenue growth to `18,655cr), (2) projects

under execution achieving substantial progress in the Power segment (51% yoy

increase in revenue to `2,185cr), and (3) 23.4% yoy increase in Others segment

(to `2,028cr). International revenues (~30% of 4QFY2016 revenues) reported a

23% yoy increase in revenues. Strong execution was seen across the Riyadh (40-

45% of civil works completed) and Doha Metro projects (tunneling works

completed, civil works related to stations would start soon).

For FY2016, revenues grew 11.6% yoy to `102,632cr, reflecting 12.3% and 47.4%

increase in Infrastructure & Power segment revenues to `50,387cr and `7,011cr,

respectively.

Exhibit 7: Quarterly Performance (Consolidated)

Particulars (` cr)

4QFY16

3QFY16

% chg (qoq)

4QFY15

% chg (yoy)

FY16

FY15

% chg

Net Sales

33,157

25,829

28.4

28,023

18.3

102,632

92,005

11.6

Total Expenditure

28,298

23,179

22.1

24,427

15.8

90,289

80,747

11.8

Man. Cons. & Opex Exp. (MCO)

24,435

19,049

28.3

20,783

17.6

74,946

67,240

11.5

Employee benefits Expense

2,242

2,411

(7.0)

2,049

9.4

9,205

8,060

14.2

Sales, Admin & Other Expenses

1,620

1,719

(5.7)

1,595

1.6

6,138

5,446

12.7

EBITDA

4,859

2,650

83.4

3,595

35.2

12,343

11,258

9.6

EBIDTA %

14.7

10.3

12.8

12.0

12.2

Depreciation

820

620

32.3

588

39.5

2,756

2,623

5.1

EBIT

4,039

2,030

98.9

3,007

34.3

9,587

8,635

11.0

Interest and Financial Charges

774

745

3.9

469

65.1

3,041

2,840

7.1

Other Income

218

452

(51.7)

290

(24.6)

1,183

1,075

10.1

PBT before Exceptional Items

3,483

1,737

100.5

2,828

23.2

7,729

6,870

12.5

Exceptional Items

(49)

(98)

(358)

(348)

PBT after Exceptional Items

3,532

1,737

103.3

2,927

20.7

8,087

7,217

12.0

Tax

954

556

71.7

766

24.5

2,549

2,253

13.1

% of PBT

27.0

32.0

26.2

31.5

31.2

PAT before Minority Int.

2,578

1,182

118.2

2,161

19.3

5,538

4,964

11.6

Extra-Ordinary Items

Share in profit of Associates (net)

(2)

(3)

Adj. of Minority Interests

(123)

(145)

(90)

(445)

(201)

PAT after Minority Interest

2,454

1,035

137.1

2,070

18.6

5,091

4,765

6.8

Adj. PAT (for excep. Items)

2,405

1,035

132.4

1,971

22.0

4,732

4,417

7.1

Adj. PAT %

7.3

4.0

7.0

4.6

4.8

Dil. EPS

26.17

11.07

136.4

22.05

18.7

54.44

50.98

6.8

Source: Company, Angel Research

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

EBITDA margins expand yoy to 14.7%

The company reported an 182bp yoy expansion in the EBITDA margin for the

quarter to 14.7%. The surge in margin was restricted owing to (1) 17.6% yoy

increase in Man. Cons. & Opex Exp. (MCO) expenses to `24,435cr, and (2) 9.4%

yoy increase in Employee expenses to `2,242cr. Surge in employee expenses is on

account of manpower augmentation, impact of normal revisions witnessed in

earlier quarter and higher staff mix from international operations. SAO expenses

increased 1.6% yoy owing to higher provisions.

Further, if we look at segment-wise details, then the EBIT margin benefitted from a

yoy expansion in segment margins across Infrastructure (322bp) and MMH

(253bp) and narrowing of loss margins across Hydrocarbons business (-566bp).

Higher SGA expenses (mainly the provisioning) and staff costs (owing to hiring

related to international business) led to marginal decline of 20bp yoy in EBITDA

margins to 12.0% in FY2016.

Adj. PAT margins expands marginally to 7.3%

L&T reported a PAT of `2,454cr for 4QFY2016. PAT margins of the company were

at 7.4%, almost the same as in the previous year. Despite a yoy EBITDA margin

expansion, a 24.6% decline in other income (to `218cr), 39.5% increase in

depreciation expenses (to `820cr) and marginally higher tax rates (at 27.0% in

4QFY2016 vs 26.2% in 4QFY2015) led to an 18.6% yoy increase in PAT. On

adjusting for exceptional items, the PAT of the company was at `2,405cr. The Adj.

PAT margin was at

7.3% in 4QFY2016, slightly better than

7.0% in the

corresponding quarter a year ago.

For the full year, effect of marginal decline in EBITDA margin was felt at the Adj.

PAT margins level too which stood at 4.6%.

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Order inflow growth disappoints the street…

Consolidated order inflow for the quarter decreased 9.0% yoy to `43,334cr (on

excluding Services business, order inflow reported 10.7% yoy decrease). A majority

of 4QFY2016 order inflows were from Infra (contributed by Building & Factories,

Power Transmission & Distribution and Transportation Infra), Hydro-Carbon and

Electrical & Automation businesses. A third of the order wins during the quarter are

from International markets.

On the whole, order inflows for FY2016 missed the guidance as anticipated.

Order Inflows for FY2016 declined 11.9% yoy to `136,858cr.

Exhibit 8: 4QFY16 Order Inflows mix (consol.)

Exhibit 9: 4QFY16 Order Book mix (consol.)

HE, 2%

Others, 3%

Hydrocarbon,

EA, 4%Others, 4%

HE, 3%

EA, 1%

Services, 0%

MMH, 3%

Power, 8%

MMH, 4%

Services, 16%

Hydrocarbon,

Power, 2%

Infrastructure,

62%

Infrastructure,

75%

Source: Company, Angel Research

L&T’s order book currently stands at `2,49,949cr, indicating a 7.4% yoy growth.

As of 4QFY2016, L&T’s order book is majorly dominated by Infra (75%), followed

by Power

(8%) and Hydro-carbon

(6%) segments. International order book

constitutes 28% of the total order book. The current order book gives revenue

visibility for over the next 10 quarters.

The Management has given 15% order inflow guidance for FY2017E on the back

of strong pipeline of projects coming-up for awarding. Some of the key highlights

on the bid pipeline front include, (1) strong pipeline of projects across Roads &

Highways (participated in bids worth `22,000cr), (2) Power (expect order wins to

the tune of `10,000cr), (3) large ticket projects nearing the awarding stage in the

Defense sector and (4) expect `17,000-18,000cr of projects to be awarded from

the Dedicated Freight Corridor (DFC).

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Ongoing developments

L&T in order to transform itself into an asset light business is

1. Pursuing IDPL re-structuring; this is at advanced stages. With 13 of the 15

Road BOT projects operational (8 operational for >12 months) and 1

Transmission project operational, there exists a strong case of L&T pursuing

Infrastructure Investment Trust (InvITs) route.

1 (Nabha) of the 5 Power plants operational is at advanced stages of being

sold.

3. Currently negotiating the sale of its General Insurance business.

All these asset divestment initiatives in our view should be looked upon positively.

Given that all these businesses are capital intensive and consume higher capital,

L&T’s overall capital requirements would subside once the sale happens.

Valuation

We upgrade to BUY with target price of `1,700

We believe L&T has a better chance to beat its order inflow guidance and also

attain its revenue growth guidance for FY2017 (in the range of 12-15%). Further,

on considering FY2016 results for Hydro-carbon vertical, we expect improved

performance to continue in FY2017. Improved performance from this should lead

to consol. margin expansion. On the whole, L&T with its diverse business profile

(E&C, Power, Alternate Energy, Roads & Highways, Defense, Metros, Urban Infra)

is well positioned to benefit from revival in domestic infra capex cycle.

Exhibit 10: Derivation of SOTP-based target price for L&T (FY2017E)

Business Segment

Methodology

Remarks

` cr

`/share

% to TP

L&T- Parent

P/E

15.0x FY2018E Earnings

100,276

1,061

62.4

Infrastructure Subsidiaries

IDPL

P/BV

1.5x FY2017E BV

11,431

121

7.1

Key Subsidiaries - Services

L&T InfoTech

P/E

15.0x FY2017E Earnings

27,127

287

16.9

L&T Finance

M-cap Basis

20% holding company discount

6,973

4.3

Realty Space

L&T Realty (inc. Seawoods Realty)

P/BV

1.0x FY2017E BV

4,000

2.5

Hydro-Carbons Business

Hydro-Carbons

P/BV

1.5x FY2017E BV

2,100

1.3

Key Subsidiaries - Manufacturing

L&T Power-equipment JVs

P/BV

1.0x FY2017E BV

700

0.4

Other Associate Companies

P/BV

1.0x FY2017E BV

5,500

3.5

International Business

International Subsidiaries

P/BV

1.5x FY2017E BV

2,400

1.5

Grand Total

160,507

1,700

100

Upside

15.3%

CMP

1,475

Source: Company, Angel Research

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

We have valued the company using sum-of-the-parts (SOTP) methodology to

capture the value of all its businesses and investments. Ascribing separate values to

its parent business on a P/E basis and investments in subsidiaries (using P/E, P/BV

and M-cap basis), we arrive at a FY2017E target price of `1,700. At the current

market price of `1,475, the standalone entity is trading at an implied P/E multiple

of 11.7x (FY2018E), which is attractive. We are of the view that L&T is a proxy play

for investors wanting to play on the revival in the Indian infrastructure growth story.

Given the 15.3% upside in the stock from the current levels, we upgrade our rating

on the stock to BUY.

Investment arguments

 Indian capex recovery is a matter of time: Regular announcements on the

policy front have eased the environment for capex revival. This along with

ongoing rate cuts makes us believe that recovery is very much on cards.

Considering that the awarding activity revival should further pick-up, we sense

full-fledged recovery to be seen from 2HFY2017E onwards. Further we expect

improvement in L&T's execution and margin expansion from FY2017E

onwards.

Uptick in the domestic order inflow environment should lead to shift in order

inflow mix more towards the domestic markets, going forward. On the back of

shift in order book towards domestic markets, we expect uptick in execution.

Accordingly, we have modeled a 13.7% top-line CAGR over FY2016-2018E.

Given that L&T is currently sitting on an order book which gives revenue

visibility for over 10 quarters, this shift in order inflow mix should help the

company in faster margin recovery. We expect EBITDA margins to expand

from 10.3% in FY2016 to 11.5% in FY2018E.

 Best stock to play the Indian infrastructure theme: We are of the view that L&T

is very well positioned to benefit from gradual recovery in the domestic capex

cycle, given its diverse sectoral exposure, strong balance sheet and better cash

flow generating potential in comparison to its peers, which are struggling with

higher leverage, and strained cash flows.

Company background

L&T, the largest Indian infrastructure conglomerate, is present across almost all the

infrastructure segments and is at the forefront of the Indian infra growth story.

Over the years, the company has diversified across various segments to encash the

untapped infra opportunity, not only in India but in other geographies as well, and

has an excellent track record of achieving the same. Currently, L&T manufactures

and services its business in over 30 countries worldwide.

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Profit & loss statement (Standalone)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E

FY18E

Net Sales

51,611

56,599

57,017

59,780

67,665

77,249

% Chg

9.7

0.7

4.8

13.2

14.2

Total Expenditure

46,138

49,932

50,530

53,609

60,459

68,404

RM & Contracting Expenses

40,205

43,346

44,397

46,629

52,610

59,636

Employee benefits Expense

3,861

4,662

4,151

4,480

5,075

5,794

Sales, Admin. & Other Exp.

2,072

1,923

1,982

2,500

2,774

2,974

EBITDA

5,473

6,667

6,488

6,171

7,206

8,845

% Chg

(3)

(5)

EBIDTA %

10.6

11.8

11.4

10.3

10.7

11.5

Depreciation

728

792

1,008

999

1,035

1,078

EBIT

4,745

5,875

5,480

5,172

6,171

7,767

% Chg

23.8

(6.7)

(5.6)

19.3

25.9

Interest and Financial Chrg.

955

1,076

1,419

1,449

1,508

1,531

Other Income

1,887

1,881

2,283

2,406

2,607

2,798

PBT

5,678

6,679

6,344

6,129

7,270

9,034

Exceptional Item

(176)

(589)

(357)

560

PBT after Exceptional Item

5,854

7,268

6,701

5,569

7,270

9,034

Tax Expenses

1,541

1,775

1,645

1,378

1,890

2,349

% of PBT

27.1

26.6

25.9

22.5

26.0

PAT before Extra-Ord. Items

4,313

5,493

5,056

4,191

5,380

6,685

Extra-Ordinary Item

(72)

Rep. PAT

4,385

5,493

5,056

4,191

5,380

6,685

% Chg

25.3

(8.0)

(17.1)

28.4

24.3

PAT %

8.5

9.7

8.9

7.0

8.0

8.7

Diluted EPS (after Extra-ord. Items)

% Chg

11.6

(8.3)

4.6

1.3

24.3

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Balance Sheet (Standalone)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E FY18E

Sources of Funds

Equity Capital

123

185

186

Reserves Total

29,020

33,476

36,899

40,532

44,162

49,067

Networth

29,143

33,662

37,085

40,718

44,348

49,253

Total Debt

8,834

11,459

12,937

13,608

13,700

12,500

Other Long-term Liabilities

788

393

470

523

569

611

Deferred Tax Liability

242

410

363

203

Total Liabilities

39,007

45,924

50,854

55,053

58,820

62,567

Application of Funds

Gross Block

11,855

11,397

12,604

13,461

14,511

15,631

Accumulated Depreciation

3,550

3,836

4,844

5,843

6,878

7,956

Net Block

8,305

7,561

7,760

7,619

7,634

7,676

Capital WIP

597

676

222

Investments

16,103

19,215

23,053

24,569

25,359

27,439

Current Assets

47,419

50,853

55,869

64,832

65,628

68,941

Inventories

2,064

1,983

2,208

1,888

2,275

2,355

Sundry Debtors

22,613

21,539

23,051

26,309

25,000

25,500

Cash and Bank Balance

1,456

1,783

1,516

1,681

1,797

2,349

Loans & Advances

9,413

10,067

10,533

13,237

14,279

15,450

Other Current Asset

11,873

15,481

18,562

21,717

22,277

23,287

Current Liabilities

33,417

32,381

36,050

42,017

39,860

41,553

Net Current Assets

14,002

18,472

19,820

22,815

25,768

27,388

Total Assets

39,007

45,924

50,854

55,053

58,820

62,567

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Cash Flow Statement (Standalone)

Y/E March (` cr)

FY13

FY14

FY15

FY16

FY17E FY18E

Profit before tax

5,678

6,679

6,344

6,129

7,270

9,034

Depreciation

728

792

1,008

999

1,035

1,078

Change in Working Capital

(3,703)

(5,029)

(1,579)

(3,730)

(3,748)

(1,986)

Net Interest & Financial Charges

422

581

909

929

973

996

Direct taxes paid

(1,653)

(1,977)

(1,645)

(1,378)

(1,890)

(2,349)

Cash Flow from Operations

1,472

1,047

5,037

2,949

3,640

6,773

(Inc)/ Dec in Fixed Assets

(1,000)

(962)

(1,655)

(1,030)

(1,040)

(1,115)

(Inc)/ Dec in Investments

1,657

(252)

(2,345)

508

528

(780)

Cash Flow from Investing

657

(1,214)

(3,999)

(521)

(512)

(1,895)

Issue/ (Buy Back) of Equity

163

144

Inc./ (Dec.) in Loans

(1,515)

2,612

1,478

672

(1,200)

Dividend Paid (Incl. Tax)

(1,115)

(1,227)

(1,375)

(1,485)

(1,595)

Interest Expenses

(850)

(1,025)

(1,419)

(1,449)

(1,508)

(1,531)

Cash Flow from Financing

(3,316)

504

(1,316)

(2,262)

(3,012)

(4,326)

Inc./(Dec.) in Cash

(410)

337

(278)

165

116

552

(inc. of Disc. Operat.)

Opening Cash balances

1,906

1,496

1,794

1,516

1,681

1,797

Closing Cash balances

1,496

1,794

1,516

1,681

1,797

2,349

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Key Ratios (Standalone)

Y/E March

FY13

FY14

FY15

FY16

FY17E

FY18E

Valuation Ratio (x)

P/E (on FDEPS)

27.9

25.0

27.3

26.1

25.7

20.7

P/CEPS

24.6

21.8

22.8

21.9

21.6

17.8

Dividend yield (%)

0.8

0.9

1.0

1.1

EV/Sales

2.5

2.6

2.5

2.2

1.9

EV/EBITDA

23.8

21.9

22.9

24.1

20.7

16.6

EV / Total Assets

3.3

3.2

2.9

2.7

2.5

2.4

Per Share Data (`)

EPS (fully diluted)

52.9

59.0

54.1

56.6

57.3

71.2

Cash EPS

59.9

67.5

64.6

67.2

68.3

82.7

DPS

12.0

12.3

13.3

14.4

15.4

Book Value

464

493

542

586

626

666

Returns (%)

RoCE (Pre-tax)

17.5

18.7

16.3

14.5

15.6

17.6

Angel RoIC (Pre-tax)

17.5

17.2

15.5

13.9

15.1

17.1

RoE

14.2

15.6

13.3

15.1

12.6

14.3

Turnover ratios (x)

Asset Turnover (Gross Block) (X)

4.4

4.9

4.8

4.6

4.8

5.1

Inventory / Sales (days)

Receivables (days)

160

142

143

151

138

119

Payables (days)

134

122

127

139

129

111

Leverage Ratios (x)

D/E ratio (x)

0.3

Interest Coverage Ratio (x)

6.9

7.2

5.5

5.2

5.8

6.9

May 27, 2016

Larsen & Toubro | 4QFY2016 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and Metropolitan Stock Exchange of India Limited. It is also registered as a Depository Participant with

CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is

a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number

INH000000164. Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing

/dealing in securities Market. Angel or its associates including its relatives/analyst do not hold any financial interest/beneficial

ownership of more than 1% in the company covered by Analyst. Angel or its associates/analyst has not received any compensation /

managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. Angel/analyst

has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market making activity

of the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine

the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable

sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way

responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from

or in connection with the use of this information.

Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

L&T

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

May 27, 2016