29 August 2013
Annual Report Update | Sector: Capital Goods
Larsen & Toubro
BSE SENSEX
S&P CNX
17,996
5,285
CMP: INR705
Tale of half full or half empty
TP: INR1,000
Buy
Analyzing 2,564 pages of subsidiary accounts
Investment in subsidiaries was curtailed at INR14b in FY13, vs INR21b YoY; and we
expect the quantum to increase to INR27b / INR23b in FY14 / FY15 respectively.
Lower investments in FY13 was supported by i) Net funding of just INR7.6b in Infra
concession (adjusted for INR1.8b of NCDs) vs average INR19b each in FY11/FY12
given the debt drawal schedules, limited progress on large projects, etc ii) INR3.7b
in property development vs INR10.4b in FY12; as Seawoods raised debt of INR6b.
Reported profits by subsidiaries was largely stable at INR6.8b in FY13 (vs INR6.3b in
FY12) and is being supported by service businesses (IT and Finance). Net loss in asset
development increased to INR5.2b in FY13, vs INR3.1b in FY12 and is impacted by i)
poor toll collections for recently commissioned projects at just 5-6% of the project
cost ii) provision for diminution in investments etc of INR1.4b in property
development business. Power BTG reported profits of INR520, but was supported
by gains on embedded derivatives / provision write backs of INR1.1b.
For L&T, subsidiaries are expected to contribute 45% of the net worth and 37% of
Capital Employed, but just 5% of the consolidated profits in FY14. L&T's consolidated
RoE has deteriorated significantly from 31% in FY07 to 16% in FY13. Correcting the
capital structure and improving RoEs are important medium term stock triggers.
Manufacturing business (BTG, ship building, forgings) provides interesting long term
opportunities.
We are cutting estimates 9%/4% respectively for FY14/15 to factor in constrained
revenues for toll road projects, manufacturing businesses, etc. Maintain Buy, with
revised SOTP based price target of INR1,000/sh. L&T remains amongst our top picks
in Indian Capital goods sector.
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
LT IN
923.1
650.8/9.6
1,146/678
-8/-18/-24
Financials & Valuation (INR b)
Y/E March
2013 2014E 2015E
Sales
614.7 664.8 745.5
EBITDA
63.9
67.3
77.5
Adj PAT *
49.3
44.4
54.3
EPS (INR)*
53.4
48.1
58.8
EPS Gr. (%)
2.8
-9.9
22.2
BV/Sh (INR) 315.7 348.3 387.5
RoE (%)
16.2
14.2
14.9
RoCE (%)
14.4
12.2
12.9
Payout (%)
24.9
32.9
32.3
Valuations
P/E (x)*
18.3
14.7
12.0
P/BV (x)
3.1
2.0
1.8
EV/EBITDA (x) 14.4
10.4
9.1
Div Yield (%)
1.3
2.0
2.3
*Cons; Price as on 28 Aug 2013
Consolidated RoE's have declined from peak levels of 31% to 16% in FY13
INR M
FY12
FY13
FY14E
FY15E
Investment in Subsidiaries
126,140
140,264
167,219 190,282
Service Sector
23,413
23,278
24,028
24,778
Overseas E&C
11,474
11,474
11,474
11,474
30.7
Asset Development
69,784
79,995
102,839 121,151
Manufacturing sector
18,970
23,311
27,913
31,913
Profits in Subsidiaries (INR m)
6,325
6,773
5,302
9,806
Service Sector
6,850
12,680
12,092
14,284
Overseas E&C
1,571
789
1,652
1,981
Asset Development
-3,101
-5,221
-4,698
-4,531
Manufacturing sector
1,005
-1,475
-3,744
-1,928
Return on Investments (%)
5.5
5.1
3.4
5.5
Service Sector
26.5
54.3
51.1
58.5
Overseas E&C
13.7
6.9
14.4
17.3
Asset Development
-5.5
-7.0
-5.1
-4.0
Manufacturing sector
6.3
-7.0
-14.6
-6.4
Note: Investment in subsidiaries includes equity investments, plus advances given,
subordinate debt, etc
Shareholding pattern %
As on
Jun-13 Mar-13 Jun-12
Dom. Inst 36.8
36.3
38.4
Foreign
20.0
21.0
18.2
Others
43.2
42.7
43.4
Stock performance (1 year)
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Larsen & Toubro
FY13 subsidiary profits impacted by poor toll collections, diminution in
investments in real estate projects
Reported profits by subsidiaries was largely stable at INR6.8b in FY13 (vs INR6.3b in
FY12) and is being supported by service businesses (IT and Finance). The net loss in
asset development business increased to INR5.2b in FY13, vs INR3.1b in FY12 and is
impacted by i) poor toll collections for recently commissioned projects at just 5-6%
of the project cost ii) provision for diminution in investments etc of INR1.4b in
property development business. Power BTG reported profits of INR520, but was
supported by gains on embedded derivatives / provision write backs of INR1.1b.
Net Profit Contribution from key subsidiaries / JVs (L&T's share, INR M)
FY10
Service Sector
5,683
L&T Infotech
2,873
L&T Finance
2,811
Overseas E&C
1,563
L&T International FZE
1,563
Asset Development
3,566
L&T IDPL
3,261
L&T Power Development
29
Sapura Shipping
0
L&T Sea Woods
-22
L&T Realty
298
Manufacturing
348
L&T MHI Turbine & Boilers
-475
L&T Special Steel & Heavy Forgings
34
L&T Ship Building
-22
Komatsu
330
Audco
160
EWAC
120
Other Subsidiaries
202
Subsidiaries / JVs Total Profits
11,160
FY11
7,088
3,160
3,928
1,977
1,977
150
-1,132
34
134
-32
1,146
696
-412
35
-32
305
165
272
363
9,911
FY12
6,850
4,190
2,660
1,571
1,571
-3,101
-3,087
73
-416
-5
335
1,005
-31
-83
-24
25
305
553
259
6,325
FY13
12,680
6,290
6,390
789
789
-5,221
-2,512
-940
177
6
-1,952
-1,475
265
-1,155
-1,906
73
398
581
271
6,773
FY14E
12,092
7,932
4,160
1,652
1,652
-4,698
-4,044
-986
178
-50
204
-3,744
-350
-1,416
-3,344
116
386
592
271
5,302
FY15E
14,284
8,919
5,366
1,981
1,981
-4,531
-3,994
-1,486
302
-50
696
-1,928
235
-1,206
-2,770
93
799
651
271
9,806
29 August 2013
2

Larsen & Toubro
Infra Development: Toll receipt below estimates
Losses to stabilize in FY14/FY15; equity funding of just INR7.6b in FY13
L&T's Infrastructure development portfolio comprises of 27 concessions (project cost INR656b),
including 18 road projects (INR216b), five power projects (INR 219b), 3 ports (INR57b) and
Hyderabad Metro (INR164b). Key takeaways from FY13 subsidiary accounts are:
Limited equity funding in FY13: Net equity investments in FY13 towards concession portfolio
stood at just INR7.6b in FY13, adjusted for the INR1.8b of Non-Convertible Debentures.
This compares with average INR19b each in FY11/FY12, and the limited investments in
FY13 are a function of i) drawal schedules given upfront equity contributions ii) limited
progress on large projects like Hyderabad Metro, three last road project wins (construction
yet to commence), Chennai Tada road project (state level issues), etc. For FY14/FY15, we
expect equity investments of INR19.7b and INR14.7b respectively.
Toll collections below estimates: We calculate that net toll revenues (excluding the share
of annual premium / revenue share payable) for several of the road projects commissioned
since FY11 stands at just 5-6% of the project cost, and are meaningfully below estimates.
During FY13, losses of the road concession portfolio increased to INR4b vs INR963m in
FY12, as three road projects were commissioned in FY13 (incremental losses of INR2.3b).
Net loss in concession business increased to INR5.8b in FY13, vs INR3.2b in FY12. During
FY14/FY15, we expect losses to be maintained at ~INR6b pa.
Expect equity
investments in
concession portfolio to
increase from INR7.6b in
FY13 to INR20b in FY14
and INR15b in FY15
Equity investments at just INR7.6b in FY13, v/s average INR19b in FY11/12
Net Equity investments in FY13 towards the concession portfolio stood at just INR7.6b
in FY13, and were largely towards road projects (INR4.6b) and Nabha Power (INR4.1b).
During FY13, L&T IDPL raised INR1.8b through issue of Non Convertible Debentures
and is amongst the first bond issuance backed by cash flows of a toll road project.
Adjusted for this, the net equity infusion in road portfolio in FY13 stood at just INR2.8b.
L&T IDPL also raised INR512m from issue of commercial paper in FY13. The limited
equity investments in FY13 was largely a function of i) drawal schedules as FY11/FY12
had witnessed equity investments of INR38b given that bankers would have insisted
for upfront equity contributions ii) limited progress on large projects like Hyderabad
Metro, three last road project wins (construction yet to commence), Chennai Tada
road project (state level issues), etc.
During FY12, L&T had
infused equity of
INR13.7b in road projects,
which was higher than
debt drawals of INR10.5b.
Hence, lower equity
investments in FY13 are
largely a function of the
drawal schedules
Roads - limited equity infusion in FY13, function of debt drawal schedules:
During
FY13, we calculate the total project capex spent on the roads portfolio at INR26b,
of which just INR4.6b was financed through equity and INR19.0b through project
debt. During FY12, L&T had infused equity of INR13.7b in road projects, which was
higher than debt drawals of INR10.5b. Hence, lower equity investments in FY13
are largely a function of the drawal schedules. During FY14/FY15, we expect
incremental equity investments of ~INR7b each; and are largely towards Beawar
Pali Pindwara (INR1.8b), Deccan Tollways (INR3b), and two project wins in
Maharashtra (INR7b). However, given that conditions precedent has not been
completed for the last three projects, the construction has not yet commenced.
We have not factored in equity investment in Chennai Tada project given the
limited progress over the last 2 years and the state level issues continue to impact
project progress.
3
29 August 2013

Larsen & Toubro
In FY14, we factor in
limited equity
investment of INR2.2b,
given the issue
surrounding Telangana
which could impact
project progress and also
the project returns
Hyderabad Metro - Appointed date declared on July 5, 2012:
During FY13, project
capex on Hyderabad Metro stood at INR9.6b, while the incremental equity
investment stood at INR931m. Again, the limited equity investment was largely a
function of the debt drawal schedules. In FY14, we factor in limited equity
investment of INR2.2b, given the Telangana issue which could possibly impact
project progress and also the project returns.
Power - Nabha Power to be commissioned in FY14:
Total capex incurred on the
1320MW Phase 1 Nabha Power project stood at INR63b, and we understand that
this comprises ~80-85% of the project cost. We expect the project to be
commissioned in FY14, however the returns will continue to remain a challenge
given the constraints in terms of fuel availability. Phase 2 of Nabha Power (700MW)
and the 4 hydro power projects have witnessed limited progress and thus we
have not factored in the incremental equity requirements.
Net Equity investments at just INR7.6b in FY13, expect increase in FY14/15
Project
Cost
FY11
Equity Invested
FY12
FY13
FY14E
26,832
5,892
3,307
5,300
13,730
4,260
59,320
-
29,350
10,564
3,307
7,500
21,000
5,000
76,721
-
FY15E
29,510
17,597
3,307
15,000
21,000
5,000
91,414
-
Road Projects
Operational
126,000
14,027
25,657
Under Construction
90,000
332
2,437
Dhamra Port
57,000
3,300
3,307
Hyderabad Metro
164,000
3,439
4,369
Power
Nabha Power 1320MW
72,000
9,600
9,600
Others
147,000
3,700
4,020
Total Concession Portfolio
656,000
34,398
49,390
Less: Debt raised to fund
-
-
(2,313)
equity investments
Net Equity Investments
34,398
49,390
Incremental Equity
22,746
14,992
Note: Equity invested includes subordinate debt and advances
57,008
76,721
91,414
7,618
19,713
14,692
Source: MOSL, Company
Toll revenues in recently commissioned projects are meaningfully below
estimates
We calculate that the net toll revenues (excluding the share of annual premium /
revenue share payable) for several of the road projects commissioned since FY11
stands at just 5-6% of the project cost, and are meaningfully below estimates.
During FY13, losses of the road concession portfolio increased to INR4b vs INR963m
in FY12, as three road projects were commissioned in FY13 (contributing to
incremental losses of INR2.3b). During FY15, we expect commissioning of
Samakhiali-Gandhidham (Project Cost INR13b), Krishnagiri Walajahpet (INR13.7b)
and Beawar - Pali - Pindwara (INR24.7b); and poor collections could lead to
meaningful losses in the initial periods. Also, PNG Tollways commenced partial
tolling wef Oct 2012 and given the local issues, the ramp up in collections have
been poor and would impact profitability in FY14.
29 August 2013
4

Larsen & Toubro
Toll roads commissioned recently have poor collections
INR m
Status
Coimbatore By-Pass
Operational
Palanpoor- Swaroopgunj
Operational
Krishnagiri Thopur
Operational
Panipat Elevated
Operational
Jadchela - Kothakota
Operational
Narmada Infrastructure
Operational
Vadodara Bharuch
Operational
Halol-Shamlaji
Operational
Rajkot Vadinar
Operational
Shamakhiyali Gandhidham
Ph V
Krishnagiri Walajahpet
Ph V
Chennai Tada
Ph V
Ahmedabad Malliya
Operational
Pimpalgaon Nashik Gonde Operational
Devihalli Hassan
Beawar Pali Pindwara
Sangarreddy - KNT/MH
Jalgaon- Mah/Guj Border
Amravati-Jalgaon
Total Transportation
Net Toll (% of Prj Cost)
FY11
FY12
FY13
20.5
21.9
23.8
15.6
15.6
15.6
14.4
17.8
19.3
9.2
10.0
10.7
11.4
13.3
14.7
29.2
32.0
24.9
13.1
14.6
15.6
0.0
0.8
5.4
0.0
0.0
6.4
0.2
1.0
1.5
0.0
5.8
7.5
4.7
5.8
6.6
0.0
0.0
5.2
0.0
0.0
1.0
PAT
FY11
FY12
FY13
113
92
131
52
96
87
(245)
(118)
(38)
(461)
(424)
(372)
(202)
(137)
(112)
260
302
303
(786)
(598)
(405)
-
(154) (1,135)
-
- (1,251)
(52)
-
-
3
19
8
-
-
-
-
-
(843)
-
-
(376)
-
-
16
-
(14)
-
-
-
(10)
-
-
-
-
-
-
(1,319)
(936) (3,996)
Source: Company, MOSL
During FY15, we
expect
commissioning of
Samakhiali-
Gandhidham
(Project Cost
INR13.0b),
Krishnagiri-
Walajahpet
(INR13.7b) and
Beawar - Pali -
Pindwara
(INR24.7b); and
poor collections
could lead to
meaningful losses
in the initial
periods.
Net loss increased to INR5.8b in FY13, led by commissioning of road projects
We expect net losses to
remain stable in FY14/15.
However, FY16/FY17
should witness a
quantum jump as large
projects in roads (Project
cost INR112b) and
Hyderabad Metro
(INR164b) gets
commissioned
Net loss in concession business increased to INR5.8b in FY13, vs INR3.2b in FY12
and is led by: i) losses of the road concession portfolio increased to INR4b vs
INR963m in FY12, as three road projects were commissioned in FY13 (contributing
to incremental losses of INR2.3b) ii) L&T's share of losses in Dhamra Port declined
to INR835m vs INR2.3b in FY12, as throughput increased to 11.1m tons vs ~5m tons
YoY iii) Nabha Power reported net loss of INR971m largely led by exchange loss on
forward contracts.
During FY14/FY15, we expect losses to be maintained in a range of ~INR6b pa. For
the roads business, we expect that incremental losses of INR1.8b on three projects
getting operational in FY14/15 would be offset by improved revenues in
operational toll roads. The sharp reduction in losses of Dhamra Port (management
expect cash break even in FY14), would offset our expectations of higher
operational losses of INR1.5b for Nabha Power in FY15 (Case 2 bid).
FY11
FY12
(922)
(14)
(2,290)
1
33
-
(3,192)
FY13
(4,002)
6
(835)
13
(971)
-
(5,789)
FY14E
(4,101)
(220)
(525)
-
FY15E
(3,901)
(590)
(368)
-
Net losses increase in road projects, expect FY14/15 to be stable (L&T's share)
Road Projects
Operational
Under Construction
Dhamra Port
Hyderabad Metro
Power
Nabha Power 1320MW
Others
Total
(1,319)
-
-
-
14
-
(1,306)
(1,000)
(1,500)
-
-
(5,846)
(6,359)
Source: Company, MOSL
5
29 August 2013

Larsen & Toubro
Other takeaways
Financial closure achieved for all road projects:
During FY13, L&T IDPL achieved
financial closure for Deccan Tollways (debt raised INR8.9b) and also the two
Maharashtra projects (INR39.7b); which is commendable in a tight liquidity
scenario. However, given that conditions precedent has not been completed, the
construction has not yet commenced. Post these, there are no pending projects
yet to achieve financial closure in roads segment.
Dhamra Port expected to achieve cash break even in FY14:
The port handled 11.1m
tons of cargo in FY13, vs ~5m tons in FY12; and the management in a recent concall
had stated that the project losses has declined from INR4.6b in FY12 to INR1.7b in
FY13. During FY13, the Dhamra Port has also refinanced the debt to bring down
the financing costs. The management expects the project to achieve cash break
even in FY14.
29 August 2013
6

Larsen & Toubro
Property Development: Portfolio rationalization
Equity funding of just INR3.7b; Net loss of INR2b
L&T's real estate business reported losses of INR2b in FY13, vs profits in FY11/FY12; and was
largely a function of diminution in the value of investments, and is thus non-recurring in nature.
We expect profits in FY14/FY15, and the quantum will also be supported by large projects
including, retail mall in Chandigarh, Residential projects in Parel / Powai, etc. Equity investments
in FY13 stood at just INR3.7b vs INR10.4b in FY12; as Seawoods raised debt of INR6b to meet
the project commitments. Going forward, we believe that their exists options for securitization,
etc to fund commitments, and thus incremental equity requirement should be minimal.
Real estate business losses at INR2b in FY13, vs profits in FY11/FY12
L&T Urban Infra reported
losses of INR1.4b towards
provision for diminution
in value of investments
and Bangalore Airport
Hotel reported loss of
INR445m (interest cost
post initiation of arbitrary
proceedings)
L&T Urban Infra (loss of INR1.4b):
The losses are largely driven by: i) Provision for
diminution in investments in L&T Chennai Projects (INR799m, on sale of subsidiary)
and L&T Bangalore Airport INR333m (post losses and commencement of
arbitration); ii) Loss on sale of investments in L&T Commercial Projects (INR153m),
iii) ICDs written off (INR211m) and Interest waived (INR50m) towards L&T Chennai
Projects, etc.
Bangalore Airport Hotel (loss of INR445m):
Due to non-allotment of land, the
company was not able to implement the project and hence invoked the arbitration
proceedings. The arbitration award was made on April 20, 2013. Since substantial
construction activities were suspended during the arbitration period,
capitalization of borrowing cost has also been suspended leading to finance costs
of INR410m in FY13. Total investment made by L&T Urban Infra was INR533m and
of this provision in diminution was made of INR333m.
Expect profits in FY14/FY15, also supported by contributions from large
projects
The losses in FY13 were
largely a result of the
diminution in the value
of investments and thus,
non-recurring to that
extent
CSJ Infrastructure (82% holding):
The project entailed development of retail mall
(1.1msf, to be leased) and office space (0.42msf, to be sold) in Chandigarh. The
construction of both the retail mall and office space was completed in March
2013; while the construction of hotel will be completed in March 2014. The initial
response has been encouraging, and we understand that almost the entire retail
area has been leased. Debt outstanding as at March 2013 stood at INR9.4b, while
equity invested (including advances) stood at INR3.3b.
L&T Parel (investments of INR2.4b by L&T Realty):
While the Annual Report does
not have details on this project, we understand that the Boiwada project is
probably amongst the largest Slum Development Project in the country and is in
partnership with Omkar Realty. L&T has invested INR2.4b in this project in FY13.
We also understand that the initial response has been encouraging and this project
could contribute to profitability in FY14.
L&T Seawoods (raised debt of INR6b in FY13):
Seawoods is amongst the most
ambitious real estate project in L&T and entails integrated development of ~6msf
of office, retail and hotels. Of the INR18b payable to CIDCO, the company has
already paid INR10.9b as at March 2013 and the balance will be paid by FY15 in two
equal installments. L&T's equity investment in the project stands at INR11.4b as
at March 2013; during FY13, the subsidiary raised external debt of INR6b towards
project expenses and payment of INR3.6b to CIDCO which had limited the equity
7
29 August 2013

Larsen & Toubro
investments in the project in FY13. We understand that Phase 1 will entail
development of ~5msf, including ~3msf of commercial and retail development,
plus ~2msf of railway infrastructure (including basement), etc. The profit
contribution will largely be a function of the financial closure of Phase 1
development and also the marketing response.
Powai (Expect INR2b contribution to profits in FY15):
We understand that L&T has
launched 1msf of residential projects in Powai (existing manufacturing units) and
the average realizations have been ~INR18,000-19,000/sq ft. Given the encouraging
response initially, we expect that this project should contribute ~INR2b to
profitability in FY15. However, this project is part of L&T standalone.
Expect Property Development business to report strong profits in FY15
FY11
L&T Infocity Ltd
1,399
Hyderabad International Trade Expositions
28
L&T Hitech City
(78)
L&T Chennai Projects (Formerly Arun Excello IT SEZ) (173)
Bangalore International Airport (Hotel) Ltd.
(2)
CSJ Infrastructure Private Ltd
(10)
L&T Urban Infra
347
Total
1,654
FY12
399
27
(50)
(272)
0
(45)
126
371
FY13
FY14E
FY15E
97
102
107
70
74
77
(24)
100
150
(413)
(289)
0
(445)
(445)
0
115
400
550
(1,412)
0
0
(1,994)
(23)
921
Source: Company, MOSL
Equity investments of just INR3.7b; L&T Seawoods raised debt of INR6b to
finance project investments
The incremental funding
requirement, especially
in Seawoods, has been
met through debt raised
of INR6b in FY13
During FY13, L&T invested INR2.6b as equity in L&T Realty (INR14.8b as at March 2013)
and INR1b in L&T Seawoods. This compares with FY12 investments of INR8.8 in L&T
Realty and INR1.6b in L&T Seawoods. The incremental funding requirement, especially
in Seawoods, has been met through debt raised of INR6b in FY13; to meet the
commitment of INR3.6b towards CIDCO and for other project expenses.
Going forward in FY14/FY15, we expect the real estate business to require incremental
investments of INR6b largely towards the balance commitment towards CIDCO in
Seawoods. We await further details on the commissioning of Phase 1 construction at
Seawoods and thus have not factored in the equity commitment towards the project.
We also believe that the commissioning of the retail mall at Chandigarh provides
options for securitization of cash flows and thus the incremental funding requirements
is expected to be limited.
Focus on portfolio rationalization
L&T Chennai Projects:
During FY13, L&T entered into a term sheet on March 15,
2013 for sale of its investments against which an advance of INR250m has been
received. After considering the terms of sale consideration in the term sheet for
the entire investments in the said subsidiary, provision for diminution in the
value of investments of INR799m has been made. The sale of investments is subject
to due diligence by the buyer, SEZ Board of approval and other conditions to be
fulfilled by the company which are in progress. The company was setting up an IT
SEZ at Vallencheri (outskirts of Chennai). We understand that 0.37msf has been
completed, but given the poor demand conditions, occupancy was very poor.
8
29 August 2013

Larsen & Toubro
L&T Vision Ventures:
The subsidiary had entered into development agreement
with Vishakhapatnam Urban Development Authority for development of an
integrated township at Vishakhapatnam. Subsequently, Vishakhapatnam Urban
Development Authority has not been able to allocate suitable unencumbered
land as stipulated in the agreement and has also not refunded the money paid to
it. Hence, the company has initiated arbitrary proceedings in October 2012.Pending
resolution of arbitration proceedings, L&T Urban Infra has made provision of
INR30m.
L&T Realty land in Vizag:
L&T Realty had acquired 15 acres of land in Vizag in 2008.
In the current market scenario, it was found that it would not be economically
feasible to develop the land. The company has executed an MOU with a
prospective buyer for sale of this land and the transaction is expected to be
completed in FY14.
29 August 2013
9

Larsen & Toubro
Manufacturing JVs: Asset turn of 0.5x
Expect losses to double in FY14 to INR6b, impacted by macro headwinds
Manufacturing Businesses have fixed assets of INR73b as at March 2013, and revenues of just
INR34b i.e. asset turn of 0.5x. L&T Special Steel and Heavy Forgings (LTSSHF) commenced
commercial operations in October 2012 and L&T Shipbuilding in 4QFY13. Power BTG business
reported profits of INR520m in FY13, but was supported by embedded derivative gains of
INR741m and provision write back of INR317m in the boilers business. Thus, we expect the BTG
business to slip back to losses in FY14. The challenge is uncertain business environment over
the medium term, even as these businesses present interesting long-term opportunities.
Manufacturing business reports losses of INR3b in FY13, impacted by macro headwinds
Boilers
FY12
FY13
Financial Performance
Revenues
Gross Profit
Gross Margins %
EBIDTA
EBIDTA %
Net Profit
Fixed Asset Turn
Gross Fixed Assets
Fixed Asset Turn
MTM on forex debt
Forex Debt
MTM impact
%
24,250
2,498
10.3
417
1.7
111
5,173
4.7
-
0
23,598
3,380
14.3
2,060
8.7
1,414
5,318
4.4
-
0
Turbine
FY12
FY13
12,288
849
6.9
361
2.9
(171)
8,677
1.4
8,707
122
1.4
9,923
1,499
15.1
328
3.3
(895)
12,824
0.8
9,577
421
4.4
Heavy Forgings
FY12
FY13
-
-
(112)
(112)
12,895
-
2,035
26
1.3
141
(242)
-172.2
(616)
-438.1
(1,561)
15,350
0.0
2,660
57
2.1
Shipbuilding
FY12
FY13
-
-
(52)
(24)
31,550
-
-
0
1,048
(216)
-20.6
(734)
-70.0
(1,965)
39,804
0.0
-
0
Total Mfg
FY12
FY13
36,538
3,347
9.2
614
1.7
(196)
58,295
0.6
34,710
4,421
12.7
1,038
3.0
(3,007)
73,296
0.5
10,742
12,237
148
478
1.4
3.9
Source: Company, MOSL
L&T MHI Boiler (strong profits of INR1.4b in FY13 supported by Derivative
gains and provisions write back)
Given the higher indigenization levels, the boiler business reported gross margins
of 14.3% in FY13 (vs 10.3% in FY12), which is encouraging. Reported EBIDTA margins
also improved to 8.7% in FY13 (vs 1.7% YoY) and is being supported by: i) Embedded
derivative gains of INR741m and ii) Provision write backs of INR317m. Adjusted for
the same, net profits stand at just INR348m, vs reported INR1.4b.
During FY13, order intake stood at INR19.3b and closing order book stood at INR90b
(we understand that this includes slow moving orders of Jaiprakash Karchana
1980MW and Rajpura 700MW). Exports market is an important thrust area, and the
company has received orders from MHI for supply of pressure parts for Rajbigh
Arabian Water Electricity Company, Saudi Arabia. The JV is also looking for
opportunities to make inroads for operational spares for pressure parts and coal
pulverizers in the Indian market.
During FY14/FY15, we model revenue decline of 7% till FY15 to INR21.9b and EBIDTA
margins at 4.5% / 5.2% in FY14/15 respectively; vs 8.7% in FY13. We estimate net
profits at INR535m in FY14 and INR647m in FY15, vs INR1.4b in FY13.
29 August 2013
10

Larsen & Toubro
L&T MHI Turbine Generator (impacted by forex loss of INR421m)
Revenues in FY13 declined 19% YoY to INR9.9b; however given the various
initiatives in terms of cost rationalization, improved supply chain management,
etc, the gross margin improved meaningfully from 6.9% in FY12 to 15.1% in FY13.
EBIDTA margins stood at 3.3% in FY13 vs 2.9% YoY, and were impacted by forex
provisions of INR421m. Adjusted for the same, EBIDTA margins in FY13 improved
meaningfully to 7.5% in FY13. Forex debt outstanding as at March 2013 stands at
INR9.6b; and given the sharp currency volatility, we model in exchange loss of
INR700m in FY14.
Net loss in FY13 stood at INR895m, and given the constrained business
environment / currency volatility, we model in losses at INR1.2b in FY14 and
declining to INR187m in FY15.
L&T Special Steel and Heavy Forgings (FY13 loss at INR1.6b)
L&T Special Steel and Heavy Forgings (LTSSHF) commenced commercial operations
wef October 1, 2012. The company reported revenues of just INR141m, and the
business is being impacted by a constrained macro environment. Also, given the
initial issues, the gross margins were negative at INR242m. FY13 also included
pre-operative expenses of INR209m, impacting the reported profits.
While the manufacturing facility is largely meant for nuclear power forgings, the
company supplied large sized ingots and forgings for refineries, fertilizers, etc.
We model revenues of INR3.5b in FY14 / INR5.3b in FY15, given the constrained
macro environment. However, given the under absorption of interest and
depreciation, coupled with sub-optimal operating levels, we model losses at
INR1.9b in FY14 / INR1.6b in FY15, vs INR1.6b in FY13. Forex debt stands at INR2.7b
as at March 2013.
L&T Shipbuilding (FY13 loss at INR2b)
The shipbuilding facility was commissioned in FY13 with a lifting capacity of 21,000
tons; also the operations include container port with capacity of 1.2m TEUs. During
FY13, the company bagged orders for supply of four specialized commercial vessels
at cost of INR4.8b; and delivered one interceptor boat in March 2013. The maiden
vessel call at Kattupalli port was in January 2013.
In FY13, revenues from shipyard stood at INR1b while the port revenues stood at
just INR22m. The segmental assets for shipyard stands at INR21.9b and for the
port at INR19.5b. Given the delays in terms of finalization of large naval orders
and also the gestation period involved in port operations, we model in revenues
at INR9b in FY14 and INR12.5b in FY15. However given the un-absorption of fixed
capital costs, we model in net loss of INR3.4b in FY14 / INR2.9b in FY15, a meaningful
increase from INR2b in FY13.
Expect losses to double in FY14 at INR6b, impacted by macro headwinds
Manufacturing Businesses has fixed assets of INR73b as at March 2013, and revenues
of just INR34b i.e. asset turn of 0.5x. This is very low compared with fixed asset turn of
7.5x for L&T standalone, 10x for BHEL and 9.5x for Cummins India. The challenge is
uncertain business environment over the medium term, even as these businesses
present interesting long-term opportunities. Several of these businesses are difficult
to replicate. We believe that the strategy will be to live through the interim pain.
29 August 2013
11

Larsen & Toubro
Manufacturing Business: Returns impacted by macro headwinds (INR M)
Stake %
L&T MHI Turbine
51
L&T MHI Boilers
51
L&T Special Steel & Heavy Forgings 74
L&T Ship Building
97
Total Losses
L&T's share
FY11
(284)
(524)
48
(32)
(792)
(408)
PAT (INR M, L&T's share)
FY12
FY13
FY14E
(171)
(895) (1,221)
111
1,414
535
(112) (1,561) (1,913)
(24) (1,965) (3,447)
(196) (3,007) (6,046)
(137) (2,797) (5,109)
FY15E
(187)
647
(1,630)
(2,856)
(4,026)
(3,742)
Equity / Advances (INR M, by L&T)
FY11
FY12
FY13
FY14E
FY15E
1,276
1,276
1,737
1,800
1,800
1,123
1,123
1,194
1,194
1,194
2,220
3,330
4,457
5,996
7,496
6,975 10,205 12,405 15,405
17,905
11,593 15,933 19,793 24,395
28,395
29 August 2013
12

Larsen & Toubro
L&T: Cutting estimates, Maintain Buy
We are cutting estimates 9%/4% respectively for FY14/15 to factor in constrained
revenues for toll road projects, manufacturing businesses, etc. We now expect
consolidated EPS at INR48.1/sh in FY14 and INR58.8/sh in FY15. Maintain Buy, with
revised SOTP based price target of INR1,000/sh. L&T remains amongst our top picks in
the Indian Capital goods sector.
L&T: SOTP valuations
Method
Construction Business
L&T Standalone
International Ventures (L&T FZE)
Service Segments
Infotech
Finance
General Insurance
Sapura Shipping
L&T Realty
Asset Ownership / Project Developer
Infrastructure Development Projects
Power Development Projects
Manufacturing Ventures
- Power Equipments
- Special Steel and Heavy Forgings
- L&T Komatsu
- Audco India
Valuation
multiple
14.0
14.0
10.0
1.20
1.0
1.5
1.0
1.0
0.5
Value
(INR b)
673
28
89
82
6
1
32
58
13
Value
(INR/sh)
729
30
97
73
6
2
35
63
14
Rationale
FY15E PER (x)
FY15E PER (x)
FY15E
FY15E
FY15E
FY15E
FY15E
PER (x)
PBV (x)
PBV (x)
PBV (x)
PBV (x)
At par with Market average
At par to second tier IT companies
At par with NBFCs
At par with industry average
FY15E PBV (x)
FY15E PBV (x)
Lower than Net Worth to capture the
macro volatility
At 50% of BV, to factor in the
challenges of fuel availability
At Book Value, given the business
headwinds
In line with industry average
Revenue growth and margins have
shown strong consistency
In line with industry average
FY15E PBV (x)
FY15E PBV (x)
FY15E PER (x)
FY15E PER (x)
1.0
1.0
10.0
10.0
10.0
3
4
2
8
7
3
4
1
4
4
-67
1,000
- EWAC Alloys
FY15E PER (x)
Less: Holding Company Discount of 20%
Total
Source: Company, MOSL
One-year forward P/E
One-year forward P/B
29 August 2013
13

Larsen & Toubro
L&T: Operating Matrix
Order Intake (INR b)
Domestic
Growth (%)
Overseas
Growth (%)
Order Book (INR B)
Growth (%)
Process
Oil & Gas
Power
Infrastructure
Others
BTB (x)
BTB (x) E&C
Gross Revenues (INR b)
Growth (%)
E&C
MIP
EBG
Others(incl. eliminations)
FY08
420
361
44
60
8
527
43
74
121
84
190
58
2.1
2.7
252
41
190
23
24
15
FY09
516
450
25
66
11
703
33
112
98
155
288
49
2.1
2.5
340
35
280
24
25
12
13.0
12.9
20.1
13.2
1.9
30.7
34.2
FY10
696
661
47
35
-47
1,002
43
160
150
301
331
60
2.7
3.1
370
9
318
21
27
3
14.5
13.6
22.1
15.7
46.0
34.3
41.1
FY11
798
718
9
80
129
1,302
30
208
156
417
469
52
3.0
3.4
439
19
377
27
28
7
14.2
13.6
21.2
16.7
4.5
37.2
46.4
FY12
706
579
-19
127
59
1,457
12
219
146
408
627
58
2.7
3.1
531
21
465
27
31
9
12.8
12.7
19.5
12.7
0.5
44.3
52.0
FY13
880
731
26
150
18
1,536
5
154
123
430
753
77
2.5
2.8
608
15
541
22
32
14
12.3
11.5
16.3
13.6
34.2
44.9
53.4
FY14E
891
641
-12
250
67
1,766
15
153
187
469
855
101
2.7
3.0
661
9
583
24
33
21
11.5
11.3
14.0
13.0
14.2
45.6
48.1
FY15E
1,051
811
26
240
-4
2,075
17
162
256
546
975
137
2.8
3.2
742
12
648
27
38
29
11.6
10.5
13.0
13.5
32.0
52.1
58.8
EBITDA Margin (%)
12.9
E&C
12.8
MIP
18.9
EBG
17.0
Others(incl. eliminations) -1.7
Standalone EPS*
Consolidated EPS
23.2
26.1
ROE (%) [Standalone]
22.0
ROE (%) [Consolidated]
22.6
Wkg. Capital (% of sales)# 7.1
* Standard EPS excluding dividend
# Adujsted for subsidary advance
21.7
17.4
16.6
18.0
16.2
14.2
14.9
21.8
22.3
17.3
16.5
14.5
9.3
5.5
6.7
12.0
14.9
19.3
19.1
an interest on advances from subsidary compaines;
Source: Company, MOSL
29 August 2013
14

Larsen & Toubro
Financials and Valuation
Income Statement
Y/E March
Total Revenues
Growth Rate (%)
Excise Duty
Net Revenues
Growth Rate (%)
Manufacturing Expenses
Staff Cost
S G &A Expenses
EBITDA
Change (%)
Adj EBIDTA
Depreciation
EBIT
Net Interest
Other Income
Non-recurring Other Income
Add: Trf to Rev. Res.
Profit before Tax
Tax
Effective Tax Rate (%)
Reported Profit
EO Adjustments
Adjusted Profit
Cons. Profit (Adj)
Growth (%)
2011
442,961
18.6
3,902
439,059
18.6
334,681
28,301
19,778
56,299
18.8
56,299
5,905
50,394
6,193
9,106
2,369
11
55,686
19,436
34.9
39,580
3,329
36,250
42,416
14.3
2012
537,378
21.3
5,673
531,705
21.1
410,224
36,661
22,182
62,639
11.3
64,639
6,807
55,831
6,661
11,748
1,635
0
62,553
18,538
29.6
44,565
550
45,375
47,730
12.5
2013
614,709
14.4
5,976
608,733
14.5
479,524
44,363
20,911
63,934
2.1
66,784
8,049
55,885
9,824
18,509
0
0
64,570
18,005
27.9
49,106
2,541
47,327
49,327
3.3
2014E
664,792
8.1
6,463
658,329
8.1
515,663
48,800
26,592
67,274
5.2
68,354
8,789
58,485
11,500
14,389
0
0
61,374
16,571
27.0
44,803
0
45,559
44,420
-9.9
(INR Million)
2015E
745,492
12.1
7,247
738,245
12.1
577,265
53,679
29,820
77,480
15.2
77,480
9,576
67,904
11,000
16,305
0
0
73,209
19,766
27.0
53,443
0
53,443
54,287
22.2
Balance Sheet
Y/E March
Equity Capital
Reserves and Surplus
Net Worth
Debt
Deferred Tax Liability
Capital Employed
Gross Fixed Assets
Less : Depreciation
Add : Capital WIP
Net Fixed Assets
Investments
Inventory
Sundry Debtors
Cash & Bank
Loans & Advances
Other Current Assets
Current Assets
Current Liabilities
Net Current Assets
Capital Deployed
E: MOSL Estimates
29 August 2013
2011
1,218
217,245
218,463
71,611
2,635
292,708
89,465
23,025
7,713
74,153
146,848
15,772
124,276
17,296
82,253
110,501
350,099
278,392
71,707
292,708
2012
1,225
251,005
252,230
98,958
1,330
352,518
105,544
29,495
7,587
83,636
158,719
17,766
187,169
17,781
90,616
120,636
433,968
323,807
110,162
352,516
2013
1,231
290,196
291,427
88,342
2,442
382,211
119,844
36,775
5,968
89,020
161,036
20,641
226,130
14,556
91,630
118,730
471,687
339,532
132,155
382,212
2014E
1,231
320,272
321,503
120,000
2,422
443,925
131,295
45,564
4,500
90,230
176,170
23,042
250,165
17,143
103,083
128,764
522,197
345,105
177,092
443,492
(INR Million)
2015E
1,231
356,439
357,670
120,000
2,422
480,092
142,295
55,140
4,500
91,655
169,487
23,993
280,533
39,517
116,391
144,348
604,782
386,265
218,517
479,659
15

Larsen & Toubro
Financials and Valuation
Ratios
Y/E March
Basic (INR)
Standalone EPS Adj
Growth (%)
Consolidated EPS Adj
Growth (%)
Cash Earning per Share
Book Value
Dividend Per Share
Div. Payout (Incl. Div Tax ) %
Valuation (x)
P/E (Standalone)
P/E (Consolidated)
Price / CEPS
EV/EBITDA
EV/ Sales
Price / Book Value
Dividend Yield
Return Ratio (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Asset Turnover (x)
Leverage Ratio
Current Ratio (x)
D/E (x)
16.6
13.9
102.4
13.0
1.5
1.3
-0.1
18.0
14.3
127.1
12.1
1.5
1.3
0.1
2011
39.7
12.6
46.4
13.0
46.3
239.2
9.7
28.4
2012
49.4
24.4
52.0
11.9
57.0
274.6
11.0
25.0
2013
51.3
3.8
53.4
2.8
60.1
315.7
12.3
24.9
19.1
18.3
11.7
14.4
1.5
3.1
1.3
16.2
14.4
134.3
12.3
1.6
1.4
0.1
2014E
49.4
44.4
48.1
35.1
58.9
348.3
13.8
32.9
14.3
14.7
12.0
10.4
1.1
2.0
2.0
14.2
12.2
137.4
12.7
1.5
1.5
0.2
2015E
57.9
17.3
58.8
22.2
68.3
387.5
16.2
32.3
12.2
12.0
10.3
9.1
0.9
1.8
2.3
14.9
12.9
137.4
11.7
1.6
1.6
0.1
Cash Flow Statement
Y/E March
PBT before EO Items
Add : Depreciation
Interest
Less : Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(Inc)/Dec in FA
(Pur)/Sale of Investments
Investment in subs
Advances to subs
CF from Investments
(Inc)/Dec in Net Worth
(Inc)/Dec in Debt
Less : Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
29 August 2013
2011
55,686
6,003
6,193
19,436
-8,012
40,434
-16,429
6,812
-16,607
-9,598
-35,822
7,927
3,603
6,193
8,973
-3,636
4,306
14,319
18,624
2012
63,103
7,005
6,661
18,538
-33,268
24,963
-16,487
4,968
-16,839
-4,703
-33,061
-978
27,347
6,661
9,962
9,746
1,648
17,296
18,943
2013
67,111
8,194
9,824
18,005
-26,418
40,706
-13,578
12,065
-14,380
1,217
-14,676
3,425
-10,616
9,824
11,119
-28,133
-2,103
17,781
15,678
2014E
61,374
8,789
11,500
16,571
-34,230
30,862
-10,000
3,682
-18,818
-8,138
-33,274
1
31,658
11,500
12,243
7,916
5,504
14,557
20,061
(INR Million)
2015E
73,209
9,576
11,000
19,766
-11,431
62,588
-11,000
22,125
-15,442
-7,620
-11,937
0
0
11,000
14,727
-25,727
24,923
17,143
42,066
16

Capital Goods
Gallery

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Larsen & Toubro
No
No
No
No
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States.
In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state
laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein
are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended
(the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into
a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within
the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer,
MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst
account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors
Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore
to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Kadambari Balachandran
Email : kadambari.balachandran@motilaloswal.com
Contact: (+65) 68189233 / 65249115
Office address: 21 (Suite 31), 16 Collyer Quay, Singapore 049318
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com