15 May 2012
4QFY12 Results Update | Sector: Capital Goods
Larsen & Toubro
BSE SENSEX
S&P CNX
16,216
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
4,908
LT IN
608.9
1,868/971
-4/-7/12
706.3
13.1
CMP: INR1,160
TP: INR1,417
Buy
* Consolidated; EPS is fully diluted
4QFY12 operational performance in line:
Larsen and Toubro (LT) reported revenue growth of 21% YoY and
EBITDA growth of 9% YoY for 4QFY12, largely in line with our estimates. PAT grew 22% YoY, higher than our
estimate, supported by higher other income, lower interest and lower tax rates.
Missed FY12 order intake guidance; EBITDA margin in line:
In 4QFY12, order intake was INR212b, down 30%
YoY. In FY12, order intake was INR706b, down 12%; the management had guided 5% growth. LT is seeing
meaningful increase in order contribution from the Infrastructure segment while the share of Oil & Gas has
declined significantly in the last two years. The contribution from overseas orders has also increased
meaningfully. In FY12, E&C margins declined 95bp to 12.7% v/s management guidance of 75-125bp decline.
Management guidance for FY13 a positive surprise:
The management has guided 15-20% growth in order
intake and revenue for FY13, and EBITDA margin within 50bp of FY12 level. Order intake of INR805b-840b in
FY13 will be supported by INR120b-150b of project deferments in FY12, increase in contribution of international
markets from 18% in FY12 to 25%, steady contribution of ~20% from the Buildings & Factories, Oil & Gas and
Process Industries.
Standalone profit to remain flat YoY; manufacturing JVs to impact consolidated profit:
We expect standalone
EPS (net of dividend from subsidiaries) to remain flat at INR67/INR68 for FY13/14 v/s INR67 in FY12. Revenue
would grow at a CAGR of 10% while EBITDA margin would decline by 72bp over FY12-14. We estimate
consolidated EPS at INR87 (+12%, upgrade of 5%) for FY13 and at INR89 (+2%, downgrade of 4%) for FY14. There
exist headwinds to consolidated numbers, given poor business visibility for manufacturing JVs like Power
BTG, Shipbuilding and Forgings, and investment in BOT projects. Our estimates do not fully capture the
possible impact of capacity under-utilization in the initial periods. Maintain
Buy
with an SOTP-based target
price of INR1,417. We value LT standalone at 14x FY14E earnings and subsidiaries at INR428/share.
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 39820 5410
Deepak Narnolia
(Deepak.Narnolia@MotilalOswal.com); +91 22 3029 5126

Larsen & Toubro
4QFY12 operational performance in line
LT reported revenue growth of 21% YoY and EBITDA growth of 9% YoY for 4QFY12,
largely in line with our estimates. PAT grew 22% YoY, higher than our estimate,
supported by higher other income, lower interest and lower tax rate. Interest
expense at INR1.2b was lower than our estimate of INR2.2b, led by better liquidity
management, repayment of high cost debt and packing credit in foreign currency.
Tax rate was 26.9% in 4QFY12 v/s our estimate of 38%.
EBITDA margin declined 150bp YoY, impacted by increase in raw material cost,
which increased by 230bp YoY as a percentage of sales. While staff cost was flat
YoY, SG&A expenses were down 120bp YoY and other manufacturing expenses
declined 40bp YoY.
4QFY12 revenue up 21% YoY; execution healthy
EBITDA margin down 150bp YoY
Source: Company, MOSL
Missed FY12 order intake guidance; expect 15-20% growth in FY13
Missed FY12 order intake guidance:
In 4QFY12, order intake was INR212b, down
30% YoY. In FY12, order intake was INR706b, down 12%; the management had
guided 5% growth. Order intake was impacted by slowdown in the Power segment
and sluggish industrial capex. In the Power segment, order intake declined 42%,
while in Process Industries, order intake declined 39% YoY. The Oil & Gas segment
witnessed strong order growth on a low base and Infrastructure segment orders
grew 12%.
Order book to bill (BTB x) at 2.7x TTM
Order intake (INR b) impacted by order deferments
Source: Company, MOSL
15 May 2012
2

Larsen & Toubro
Contribution
of export orders doubled:
Export orders in the E&C segment grew 2x
to INR113b and the contribution from exports has almost doubled in FY12. In the
domestic market, E&C orders declined 22%.
Meaningful change in order mix
LT is seeing a meaningful increase in contribution of orders from the Infrastructure
segment while the share of the Oil & Gas segment has significantly declined over
the last two years.
The Infrastructure segment contributed 48% of the intake v/s 38% in FY11 and
27% in FY10. The share of Oil & Gas declined to 10% from ~15% over the past three
years and 20-25% prior to that.
The contribution from overseas orders has also increased meaningfully. Overseas
markets contributed 18% of the order intake in FY12, v/s 10% in FY11 and 5% in
FY10.
Order intake composition: Increased share of Infra/Power segments, lower contribution of Oil
& Gas adverse for margins (%)
Source: Company, MOSL
Contribution from export to order intake doubled over last two years
Source: Company, MOSL
E&C segment revenue grew 22% YoY, margins in line with guidance
E&C segment revenue grew 22% YoY while EBITDA margin declined 120bp YoY
during the quarter.
For FY12, EBITDA margin decline was in line with the management guidance of
75-125bp reduction.
15 May 2012
3

Larsen & Toubro
Net working capital rises to 12% of sales from 8% in 4QFY11
NWC increased to 12% of revenue
in 4QFY12 from 8% in 4QFY11. We expect NWC
of 13-15% in the long term. This led to lower operating cash flows at INR11b v/s
INR38b in 4QFY11. Gross debt on the book increased to INR99b from INR86b as at
2QFY12.
Cash in hand stands at INR87b,
down from INR90b in March 2011.
Balance Sheet (INR b)
Standalone
FY12
FY11
252.2
218.5
61.1
59.6
313.4
278.1
83.6
90.8
41.7
216.2
459.7
363.6
96.2
312.4
74.2
74.0
33.2
181.3
389.8
293.0
96.8
278.1
Consolidated
FY12
311.4
416.9
728.3
343.1
15.6
189.8
548.6
FY11
260.8
301.2
561.9
279.9
15.0
126.6
421.5
Net Worth
Long Term Liabilities
Total Capital Employed
Fixed Assets
Non current investments
Other Non Current Assets
Total Non Current Assets
Current Assets
Current Liabilities
Net Current Assets
Total Assets
641.4
525.8
461.6
385.4
179.7
140.4
728.3
561.9
Source: Company, MOSL
Subsidiaries' performance robust
For FY12, L&T Infotech reported 29% growth in revenue while PAT grew 33%.
Growth in revenue came primarily from North American markets and INR
depreciation. This is encouraging, as profit margins were impacted by the expiry
of STPI tax benefits.
L&T Finance Holdings reported revenue growth of 42% and PAT growth of 16%.
15 May 2012
4

Larsen & Toubro
Subsidiary performance (INR m)
L&T Infotech
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12
Sales (INR m)
4,730
4,690
5,120
4,570
5,670
5,890
6,010
7,010
7,380
7,760
8,350 8,170
Growth (%)
4.6
(17.3)
(2.3)
(8.4)
19.9
25.6
17.4
53.4
30.2
31.7
38.9
16.5
PAT
610
570
730
900
750
760
710
940
900
1,030
1,160 1,100
Growth (%)
-
(29.6)
23.7
38.5
23.0
33.3
(2.7)
4.4
20.0
35.5
63.4
17.0
Net Profit Margin (%) 12.9
12.2
14.3
19.7
13.2
12.9
11.8
13.4
12.2
13.3
13.9
13.5
Source: Company, MOSL
L&T Finance Holdings (NBFCs)
(INR m)
Loans and Advances
Total Income
PAT
NIM (%)
Gross NPA (%)
Credit Losses (%)
L&T Finance Holdings (PAT)
Average Net Worth
4QFY12
254,420
8,520
1,390
6.0
1.8
0.7
1,410
38,230
4QFY11
182,430
6,030
1,110
6.6
1.1
0.8
970
26,190
FY12
254,420
30,070
4,660
5.4
1.8
0.9
4,550
38,230
FY11
YoY (%)
4QFY12
FY12
39.5
39.5
41.3
42.0
25.2
7.9
182,430
21,170
4,320
6.8
1.1
1.2
3,910
45.4
16.4
26,190
46.0
46.0
Source: Company, MOSL
Valuation and view
We expect standalone profits (net of dividend from subsidiaries) to remain flat over
the next two years. Manufacturing JVs would have a negative impact on consolidated
profits. Dividend income from subsidiaries was INR4.1b in FY12 (v/s INR2.3b in FY11);
adjusted for this, standalone EPS for FY12 was INR67 (up 11%). We expect standalone
EPS (net of dividend from subsidiaries) to remain flat at INR67/INR68 for FY13/14 v/s
INR67 in FY12. Revenue would grow at a CAGR of 10% while EBITDA margin would
decline by 72bp over FY12-14. We estimate consolidated EPS at INR87 (+12%, upgrade
of 5%) for FY13 and at INR89 (+2%, downgrade of 4%) for FY14. There exist headwinds
to consolidated numbers, given poor business visibility for manufacturing JVs like
Power BTG, Shipbuilding and Forgings, and investment in BOT projects. Our estimates
do not fully capture the possible impact of capacity under-utilization in the initial
periods. Maintain
Buy
with an SOTP-based target price of INR1,417. We value LT
standalone at 14x FY14E earnings and subsidiaries at INR428/share.
15 May 2012
5

Larsen & Toubro
Larsen & Toubro: an investment profile
Company description
L&T is India's largest engineering and construction
company. Apart from its core construction activity the
company is making significant inroads into diverse range
of products & services through its subsidiaries and
manufacturing JVs in Power BTG, forging and
shipbuilding. The company is also involved in various
developmental projects on BOT basis in roads, ports,
rails and power projects. Export contributes to around
~18% of the order intake.
Key investment concerns
Order intake is driven by long gestation projects and
is unlikely to favorably impact FY13 revenues and
margins. Also key investments in manufacturing JVs
and BOT projects are likely to be a drag on profits in
the near term; impacting RoEs.
An unfavorable political climate, logjams relating to
clearances for projects stifle fresh order intake
growth, hampering earnings growth.
Recent developments
In a long-awaited management succession exercise,
L&T announced appointment of Dr. K Venkatramanan
as its new CEO and Managing Director, while its
current CMD, Mr. A M Naik would continue as the
Executive Chairman for the next five years.
L&T has lost to competitors in the NTPC bulk tenders
1 & 2 worth INR390b with nil orders. This is a
significant loss given the tenders were expected to
be important drivers for growth in BTG JV.
Key investment arguments
L&T is well placed to capitalize on long-term
infrastructure demand. L&T's order backlog is worth
INR1458b implying BTB ratio of 2.7x TTM. We believe
L&T is the best play on capex with its strong
execution skills, diversified portfolio and strong
balance sheet and will benefit from a likely pick up
in demand.
L&T's operational performance continues to be
encouraging in a challenging environment. Revenue
growth is robust, with management guiding for FY13
growth at 15-20%, on back of 21% growth in FY12.
Margins have again shown some stability, given the
premium positioning and various cost optimization
/ productivity enhancement measures being
undertaken. Order intake is also expected to be
steady with management guidance for 15-20%
growth, despite a challenging macro environment.
Valuation and view
On our estimates standalone revenues would grow
at a CAGR of 10% while EBITDA margins would
decline by 72bp over FY12-14. We estimate
consolidated FY13 EPS at INR87 (+12%, upgrade of
5%) / FY14 at INR89/sh (+2%, downgrade of 4%).
Maintain
Buy
with a SOTP-based TP of INR1,417/sh.
Sector view
We maintain our Neutral view on the sector
MOSL
Forecast
87.4
88.6
Consensus
Forecast
86.2
96.7
Variation
(%)
1.4
-8.4
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
FY13E
FY14E
L&T
13.3
13.1
2.5
2.2
1.3
1.2
11.3
11.0
BHEL
8.5
11.0
1.8
1.7
1.0
1.1
5.2
6.7
Thermax
14.2
12.6
2.7
2.4
0.8
0.7
8.1
7.1
EPS: MOSL forecast v/s consensus (INR)
FY13
FY14
Target price and recommendation
Current
Price (INR)
1,160
Target
Price (INR)
1,417
Upside
(%)
22.2
Reco.
Buy
Stock performance (1 year)
Shareholding pattern (%)
Mar-12
Promoter
Domestic Inst
Foreign
Others
15 May 2012
0.0
36.6
19.7
43.7
Dec-11
0.0
37.8
17.9
44.3
Mar-11
0.0
37.5
19.6
42.9
6

Larsen & Toubro
Financials and Valuation
15 May 2012
7

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