Stock Update

Larsen & Toubro

Expect near-term uncertainties to iron out; Retain Buy

Sector: Capital Goods Larsen and Toubro (L&T) has underperformed the broader market over the
trailing two months, correcting by ~9%, led by sustained delay in revival of
Company Update project tendering in the infrastructure sector against earlier expectations of
revival post normal monsoon. L&T’s FY2020 order inflow growth guidance
Change of 10-12% seems unlikely to be achieved, with order inflows announced for
Q3FY2020 till date remaining weak (three significant orders in Rs. 1,000
Reco: Buy  crore to Rs. 2,500 crore range, one mega order above Rs. 7,000 crore). To
achieve the targeted FY2020 order inflow, L&T would require Rs. 1 lakh
CMP: Rs. 1,285 crore – Rs. 1.35 lakh crore during H2FY2020, which seems unachievable,
considering weak tendering during Q3FY2020 till date. Adding to the weak
Price Target: Rs. 1,700 â tendering, the change in Maharashtra State Government has put mega
projects such as Mumbai-Ahmedabad bullet train under review. However,
á Upgrade  No change â Downgrade
Maharashtra CM’s clarification and L&T’s strong order backlog excluding
stalled projects are expected to lead to healthy execution during FY2020-
FY2021. We have currently maintained our earnings estimates for FY2020-
Company details FY2021, awaiting clarity on big ticket-size project tendering. We introduce
FY2022E earnings in this note. We expect the government’s thrust on
Market cap: Rs. 180,388 cr infrastructure investment to remain and expect revival in project tendering
as early as Q4FY2020. However, we reduce our valuation multiple for the
52-week high/low: Rs. 1,607/1,202 standalone business to factor in near-term challenges in the sector and
arrive at a revised SOTP-based price target (PT) of Rs. 1,700. We continue
NSE volume: (No of to maintain our Buy rating, owing to attractive valuation (P/E of 15x/13x its
30.0 lakh FY2021E/FY2022E earnings) post the recent correction in the stock.
shares)
Weak order inflow for Q3FY2020 till date casts a shadow in the near term:
BSE code: 500510 L&T’s order inflows remained weak during Q3FY2020 till date, with three
significant orders (Rs. 1,000 crore to Rs. 2,500 crore) and one mega order
NSE code: LT (upwards of Rs. 7,000 crore) announced till date. L&T’s guidance of 10-12%
order inflow for FY2020 entails Rs. 1 lakh crore to Rs. 1.35 lakh crore order
Sharekhan code: LT inflow for H2FY2020. The weak order intake in Q3FY2020 till date may lead to
downward revision in order inflow guidance for FY2020. Further, Maharashtra
Free float: (No of Government putting bullet train project under review and L&T’s slow-moving
140.3 cr orders have added to near-term uncertainty for L&T.
shares)
Our Call
Valuation - Maintain Buy with a revised PT of Rs. 1,700: We believe
Shareholding (%) Maharashtra’s CM’s recent clarification related to stoppage of work on
projects awarded by the previous government sends out clear signal of
Promoters 0.0 continued thrust on infrastructure building. We expect central government’s
spending on infrastructure to pick up as early as from Q4FY2020, as it
FII 19.5 remains the key priority for the incumbent government. Further, L&T’s strong
order backlog is expected to aid execution for FY2020-FY2021, while project
DII 37.7 tendering picks up. We have introduced FY2022E earnings in this note. We
have lowered our valuation multiple for the standalone business, factoring
Others 42.7 near-term challenges in the sector, leading to revision of our SOTP-based
PT to Rs. 1,700. We continue to maintain our Buy rating, owing to attractive
valuation (P/E of 15x/13x its FY2021E/FY2022E earnings) post the recent
Price chart correction in the stock.
1,650
Key Risks
1,550
Slowdown in the domestic macro environment or weakness in international
1,450 capital investment can negatively affect the business outlook and earnings
growth.
1,350

1,250
Valuation (Consolidated) Rs cr
1,150
Particulars FY18 FY19 FY20E FY21E FY22E
Apr-19
Dec-18

Dec-19
Aug-19

Revenue 119,683 141,007 160,977 184,099 205,238

OPM (%) 11.4 11.6 12.1 12.3 12.1
Price performance Adjusted PAT 7,247 8,610 10,456 12,074 13,604
(%) 1m 3m 6m 12m % YoY growth 22.4% 18.8% 21.4% 15.5% 12.7%
Adjusted EPS (Rs.) 52.5 63.4 74.6 86.1 97.0
Absolute -9.4 1.5 -14.7 -6.8 P/E (x) 24.5 20.3 17.2 14.9 13.2
P/B (x) 3.3 2.9 2.6 2.3 2.0
Relative to
-10.5 -8.9 -16.2 -17.9 EV/EBITDA (x) 17.6 15.0 13.6 11.8 10.7
Sensex
RoNW (%) 14.0 15.2 15.7 16.3 16.2
Sharekhan Research, Bloomberg RoCE (%) 7.2 8.0 8.5 9.6 10.3
Source: Company; Sharekhan estimates

December 04, 2019 2

 Stock Update
Weak order inflows for Q3FY2020 till date: L&T announced three significant orders (Rs. 1,000 crore to Rs.
2,500 crore) and one mega order (upwards of Rs. 7,000 crore) during Q3FY2020 till date. As per management’s
guidance of 10-12% order inflow guidance for FY2020, L&T would need to bag Rs. 1 lakh crore to Rs. 1.35
lakh crore for H2FY2020. However, weak order inflows for Q3FY2020 till date is expected to fall short of
management’s yearly guidance. L&T’s strong order backlog of Rs. 3 lakh crore gives healthy revenue visibility
even after adjusting for Rs. 16,000 crore stuck project orders in Andhra Pradesh and coastal road verticals.
Hence, we believe although project tendering has remained weak in the near term, strong order backlog and
expected revival in project tendering would not materially affect execution for FY2020-FY2021.

Project awards announced during Q3FY2020 till date

Date Project Award Amount (Rs. crore) Sector Classification
10-Oct-19 Power Transmission & Distribution and 1,000-2,500 Infrastructure Significant
Metallurgy & Material Handling Businesses
23-Oct-19 EPCC Project from Hindustan Petroleum >7,000 Hydrocarbon Mega
Corporation Ltd. for Residue Upgradation
Facility
11-Nov-19 Contracts for Water & Effluent, Geostructure, 1,000-2,500 Infrastructure Significant
B&F
4-Dec-19 Contracts for Power T&D and Transportation 1,000-2,500 Infrastructure Significant
Source: BSE, Sharekhan Research

Possible end to uncertainty regarding Maharashtra projects: The infrastructure sector remained under
pressure recently due to media news circulating on stoppage of work and payments by newly elected
Maharastra CM. However, the state’s CM clarified that the state government is not planning to cancel any
project; and from the big ticket-size projects, only bullet train project is under review, while cancellation of the
same is not decided. Hence, we believe the state government would be going ahead with major projects in
Maharashtra unlike negative outcome seen from the Andhra Pradesh state government. Overall, we expect
thrust on infrastructure investments to be continued in the newly formed Maharashtra State Government.

December 04, 2019 3

 Stock Update
Outlook
Expect near-term weakness in order tendering to iron out: The infrastructure sector continued to witness
weak project tendering during Q3FY2020 till date. Further, liquidity scenario in the sector continues to be
affected with industry-facing delays in collections especially from government agencies. The Union Finance
Minister has reportedly announced a slew of measures to bring comfort into the sector. The Minister also
highlighted project tendering to pick up as early as December 15, 2019. Hence, we believe government
infrastructure spending should pick up as early as Q4FY2020, as infrastructure remains a key focus area for
the government. L&T, being a domestic quasi infrastructure play and major contender for executing big ticket-
size government projects, is expected to benefit from the expected revival of project tendering.
Valuation
Maintain Buy with a revised PT of Rs. 1,700: We believe Maharashtra CM’s recent clarification related to
stoppage of work on projects awarded by the previous government sends out clear signal of continued thrust
on infrastructure building. We expect central government spending on infrastructure to pick up as early as
from Q4FY2020, as it remains key priority for the incumbent government. Further, L&T’s strong order backlog
is expected to aid execution for FY2020-FY2021, while project tendering picks up. We have introduced
FY2022E earnings in this note. We have lowered our valuation multiple for the standalone business, factoring
near-term challenges in the sector, leading to revision in our SOTP-based PT to Rs. 1,700. We continue to
maintain our Buy rating, owing to attractive valuation (P/E of 15x/13x its FY2021E/FY2022E earnings) post the
recent correction in the stock.
SOTP Valuation Rs cr
Particulars Remarks Value (Rs cr) Per share
L&T’s core business (standalone) At 23x FY2021 estimates 160,702 1,146
Subsidiaries
L&T Infotech (LTI) Based on our target price 27,527 196
L&T Finance Holdings (L&TFH) Based on our target price 9,736 69
L&T Technology Services Ltd (LTTS) Based on our target price 11,490 82
Mintree Based on current market cap at 20% discount 5,950 42
Development projects (including IDPL) At 0.8x Book Value 12,600 90
Hydrocarbon subsidiary At 0.8x Book Value 3,000 21
Other subsidiaries At 0.8x Book Value 6,323 45
Associates & Other At 0.8x Book Value 954 7
Total subsidiary valuation 77,580 553
Fair value 238,282 1,700
Source: Company; Sharekhan Research

One-year forward P/E (x) band – Trading below historical average

60.0

50.0

40.0

30.0

20.0

10.0

-
Aug-07

Aug-14
Apr-05

Apr-12

Apr-19
Jan-07

Jan-14
Jul-03

Jul-10

Jul-17
Feb-04
Sep-04

Feb-11
Sep-11

Feb-18
Sep-18
Nov-05

Nov-12

Nov-19
Jun-06

Jun-13
May-09

May-16
Dec-02

Dec-09

Dec-16
Mar-08

Mar-15
Oct-08

Oct-15

1yr Fwd PE (x) Avg 1yr fwd PE Peak 1 yr fwd PE Trough 1 yr fwd pe

Source: Sharekhan Research

December 04, 2019 4

 Stock Update
About company
L&T is an Indian multinational engaged in technology, engineering, construction, manufacturing and financial
services and is one of the largest players in India’s private sector. A strong customer-focused approach and
constant quest for top-class quality has enabled the company to attain and sustain leadership in major lines
of businesses over eight decades. The company operates in over 30 countries worldwide.

Investment theme
Capex in the economy continues to be driven by the public sector mainly in areas of power (renewable and
T&D), transportation (roads, railways and metro projects) and defence (mainly towards indigenisation); and
L&T remains the key beneficiary. With India expected to invest significantly in infrastructure creation over the
next few years and with re-election of the government providing thrust on domestic manufacturing through
‘Make in India’ project, companies focusing on the domestic market are in a sweet spot compared to export-
centric companies. Continued emphasis on infrastructure spending with focus on rail, road and renewable is
expected to benefit L&T.

Key Risks
Slower-than-expected project execution in domestic and international markets due to various reasons such
as pending approvals and clearances from government agencies and land acquisition could affect revenue.
Further, weakness in domestic investment could impact growth and awarding of large projects, thus posing
a downside risk. Moreover, unexpected political changes in some of the developed countries, trade barriers
and conflict in the Middle East are some of the risks that can affect the company’s performance.

Additional Data
Key management personnel
A.M Naik Group Chairman
S.N Subrahmanyam Chief Executive office and Managing Director
R. Shankar Raman Chief Financial Officer
Shailendra Roy Sr. Executive V.P- Power, Heavy Engg and Nuclear
D.K. Sen Sr.Executive V.P- Infrastructure
M.V. Satish Sr.Executive V.P- Building, Minerals and Metals
J.D. Patil Sr.Executive V.P- Defence
Source: Bloomberg

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Life Insurance Corp of India 15.92
2 L&T EMPLOYEES TRUST 12.27
3 HDFC Asset Management Co Ltd 3.91
4 SBI Funds Management Pvt Ltd 2.72
5 ICICI Prudential Asset Management 2.21
6 ICICI Prudential Life Insurance Co 2.02
7 Reliance Capital Trustee Co Ltd 1.76
8 General Insurance Corp of India 1.72
9 BlackRock Inc 1.55
10 Nomura Holdings Inc 1.28
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 04, 2019 5

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