1 September 2020
Update
| Sector:
Capital Goods
Larsen & Toubro
BSE SENSEX
38,901
S&P CNX
11,470
CMP: INR955
TP: INR1,100(+15%)
Buy
E&A sale complete – is the delay a blessing in disguise?
E&A proceeds may easily take care of any COVID-19-led non-core funding risk
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
LT IN
1,402
1341 / 18.2
1554 / 661
1/-21/-32
5011
100.0
Financials Snapshot (INR b)
Y/E Mar
2020 2021E 2022E
Sales
1,455 1,419 1,631
EBITDA
163
156
189
PAT
89
69
93
EBITDA (%)
11.2
11.0
11.6
EPS (INR)
63.4
49.5
66.1
EPS Gr. (%)
10.5 -21.9
33.7
BV/Sh. (INR)
475
577
599
Ratios
Net D/E
1.9
1.6
1.7
RoE (%)
13.3
8.6
11.1
RoCE (%)
5.7
4.5
5.1
Payout (%)
26.5
30.0
30.0
Valuations
P/E (x)
15.1
19.3
14.4
P/BV (x)
2.0
1.7
1.6
EV/EBITDA (x)
18.9
20.2
17.3
Div Yield (%)
1.4
2.8
1.5
FCF Yield (%)
0.8
-1.1
-3.8
Shareholding pattern (%)
As On
Jun-20 Mar-20 Jun-19
Promoter
0.0
0.0
0.0
DII
36.0
37.9
37.3
FII
19.9
17.9
21.3
Others
44.0
44.2
41.4
FII Includes depository receipts
Stock Performance (1-year)
Larsen & Toubro
Sensex - Rebased
1,620
1,340
1,060
780
500
E&A proceeds fructify; expect after-tax cash inflow of USD1.4b:
L&T
announced the completion of the much-awaited E&A division sale to
Schneider. The deal was initially announced two years ago at EV of INR140b
and took time to achieve completion on account of the necessary approvals
needed and the fulfillment of other conditions. Barring the subsidiary in Saudi
Arabia – L&T Electrical & Automation Saudi Arabia Company Limited (LTEASA) –
for which local approvals are pending, E&A’s manufacturing facilities in India
and related subsidiaries in the UAE, Kuwait, Malaysia, and Indonesia are being
transferred to Schneider Electric. Note that Schneider Electric would use the
L&T brand for a specified period as the brand is highly popular and has a strong
recall in the Switchgear market. Adjusting for taxes and debt, the company is
likely to garner net cash inflow of USD1.4b as proceeds.
Likely nature of use of proceeds may have changed:
When the deal was
originally announced, and even until the days preceding the COVID-19
outbreak, we expected the proceeds to be utilized for buybacks or put toward
a one-time special dividend of INR70–80/sh. However, COVID-19 has posed
various challenges, including the risk of funding requirements in non-core
businesses such as L&T Finance and Hyderabad Metro. In light of this, as well
as given the uncertainties surrounding the local lockdowns and macro
environment risks, we do not expect any meaningful special dividend in the
near term. Instead, we expect L&T to use the liquidity firepower to mitigate
any troublesome risks that may emerge.
Better late than never – The delay may not be that bad:
The likely change in
the nature of use of the proceeds may be against the original expectation;
however, this has more to do with COVID-19-led risks than any change in the
management’s intention to return excess cash to shareholders. Also, despite
the long delay, proceeds of ~USD1.9b amid the pandemic further strengthen
the balance sheet – which is the primary risk for any company in the current
scenario. Owing to the proceeds, L&T is likely to maintain a strong liquidity
position and does not have to depend on debt on a net basis to support core
business execution.
Sufficient ammunition to fund any non-core funding risks:
The management
had already communicated that it may utilize part of the funds to restructure
the capital structure of the Hyderabad Metro by replacing external debt.
Thereafter, it may opt to divest the asset through the InvIT route as and when
the market for asset monetization turns conducive. Along with the
recapitalization of the Hyderabad Metro, the E&A sale’s proceeds could easily
take care of any funding risk in the L&T Finance business (given the impact of
COVID-19 and likely rise in NPAs for banks and NBFCs). We believe that even
after taking care of such funding requirements and the tax on the profits, the
Nilesh Bhaiya – Research Analyst
(Nilesh.Bhaiya@MotilalOswal.com)
Pratik Singh – Research Analyst
(Pratik.Singh@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.