Description
EQUITY ANALYSIS OF LARSEN & TOUBRO
Equity Analysis: Larsen & Toubro Limited
Industry: Engineering
Presented By:
Jitendra Kumar
June 2011
Industry Overview
• • The Engineering sector is the largest in the overall industrial sectors in India. It is a diverse industry with a number of segments, and can be broadly categorized into two segments, namely, heavy engineering and light engineering. Approximately 15-20 %growth rate in industry expected (LNT growing @ 25%) Most of the leading players are engaged in the production of heavy engineering goods and mainly produces high-value products using high-end technology. Requirement of high level of capital investment poses as a major entry barrier. Leading players in this industry are L&T, ABB, BHEL, Siemens, Thermax, Crompton Greaves, Voltas The light engineering goods segment, on the other hand, uses medium to low-end technology. Entry barrier is low on account of the comparatively lower requirement of capital and technology. The demand in the engineering sector to remain to be healthy primarily on account of the Government’s increased thrust on infrastructure development. Industry margins growing @ 12-15% Industry profitability approximately 10-14%
• •
• •
• • •
Company Overview
• Larsen & Toubro Limited (L&T) is a technology, engineering, power, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector with a strong revenue growth of 25% and order inflow growth of 15-20% in FY2012. Leadership position in all its major lines of business. L&T has an international presence, with a global spread of offices and factories. Has strong footprint in the Gulf and in China.
•
• •
Subsidiaries • Larsen & Toubro Komatsu Limited • Larsen & Toubro Finance • Larsen & Toubro Infrastructure Finance • L&T – Integrated Engineering Services (IES) • Larsen & Toubro Valves Business Group
Firm's competitive position:
• • • • • Impact on margins: EBITDA margin stable at 15.2% and strong inflows of Rs 303 bn. Capital Investment Requirement: L&T reported a strong balance sheet at the end FY 2011 with a marginal deterioration in working capita levels & gross debt to equity of 0.33X. L&T increased its investments in its subsidiaries and associates by 29.6bn to 106.4 bn at end FY2011 from FY2010-end level of Rs. 77bn primarily led by(1) buy out of PE stake in L&T IDPL and investment in other development projects of Rs. 10.7 bn (2) Increase in investment in L&T finance and L&T infrastructure finance by Rs. 6.8 bn. (3) Increase in investment in L&T power development to the tune of about Rs. 4.6 bn. Growth Rates: Management guided for strong revenue (25%) and inflows (15-20%) growth in FY2012 end. Our estimates build a marginal order inflow growth of 3% and strong revenue growth of 24% for FY2012 end.
• • • •
Key Parameters
Source: Kotak Institutional Equities’ research report
Summary Profit & Loss a/c
P & Loss statement for L & T (standalone), ends, 2011-2016E (Rs mn)
2011 Net sales and services Other operating income Net operating revenues 4,42,812 4,135 4,46,947
2012E 5,26,515 4,754 5,31,269
2013E 6,25,008 5,466 6,30,474
2014E 7,32,698 6,286 7,38,984
2015E 8,55,907 7,229 8,63,136
2016E 10,04,427 8,313 10,12,741
Direct costs
Gross profit S,G&A expenses Salaries and wages EBITDA Interest expense Depreciation EBIT Other income PBT Taxes Tax rate (%) Net income Extraordinaries
(3,44,567)
1,02,381 (17,431) (28,657) 56,293 (6,796) (4,972) 44,524 11,771 56,295 (18,690) (33.2) 37,605 -
(4,09,872)
1,21,398 (19,126) (36,031) 66,241 (7,471) (5,815) 52,955 10,746 63,702 (21,149) (33.2) 42,553 -
(4,86,443)
1,44,031 (22,697) (43,647) 77,687 (7,471) (6,469) 63,747 10,152 73,899 (24,535) (33.2) 49,365 -
(5,71,886)
1,67,098 (26,603) (51,159) 89,336 (7,471) (7,168) 74,697 10,152 84,849 (28,170) (33.2) 56,679 -
(6,67,965)
1,95,171 (31,073) (59,754) 1,04,344 (7,471) (8,018) 88,856 10,152 99,008 (32,871) (33.2) 66,138 -
(7,83,741)
2,29,000 (36,459) (70,111) 1,22,430 (7,471) (9,043) 1,05,917 10,152 1,16,069 (38,535) (33.2) 77,534 -
Summary Balance Sheet
2011 Liabilities Equity share capital Reserves and surplus Total Equity Reval reserves Secured loans 1,210 2,14,388 2,15,598 233 9,557 1,210 2,47,028 2,48,238 233 9,557 1,210 2,86,480 2,87,690 233 9,557 1,210 3,32,541 3,33,752 233 9,557 1,210 3,88,062 3,89,272 233 9,557 1,210 4,54,979 4,56,189 233 9,557 2012E 2013E 2014E 2015E 2016E
Unsecured loans
Total Liabilities
73,451
2,98,839
73,451
3,31,479
73,451
3,70,931
73,451
4,16,993
73,451
4,72,513
73,451
5,39,430
Assets Gross fixed assets Accumulated Depreciation 87,931 (22,249) 1,01,931 (28,064) 1,15,931 (34,533) 1,32,341 (41,701) 1,51,507 (49,719) 1,73,996 (58,762)
Balance sheet Cont…
Net fixed assets Capital work-in-progress Intangible assets Investments 65,682 5,000 1,427 1,48,042 73,868 5,000 1,427 1,57,529 81,398 5,000 1,427 1,67,114 90,639 5,000 1,427 1,85,079 1,01,788 5,000 1,427 2,07,929 1,15,234 5,000 1,427 2,35,546
Deferred tax assets Deferred revenue items Cash and Bank balances Inventory Debtors
(774) 7,406 84,923 1,45,582
(774) 6,969 1,00,976 1,73,101
(774) 11,011 1,19,865 2,05,482
(774) 11,562 1,40,517 2,40,887
(774) 12,140 1,64,147 2,81,394
(774) 12,747 1,92,630 3,30,223
Advances
Other current assets
72,791
11
86,550
11
1,02,741
11
1,20,443
11
1,40,697
11
1,65,111
11
Creditors
Advances fromcustomers Other current liabilities Provisions Net working capital (excash)
97,055
1,09,187 500 24,510
1,15,401
1,29,826 500 27,451
1,36,988
1,54,112 500 30,745
1,60,591
1,80,665 500 36,042
1,87,596
2,11,046 500 42,103
2,20,148
2,47,667 500 49,409
72,056
87,461
1,05,754
1,24,060
1,45,004
1,70,251
Miscallenous expenditure
Total Assets 2,98,839 3,31,479 3,70,931 4,16,993 4,72,514 5,39,430
Discounted Cash Flow
Cash Flow Working
2011 PAT Depreciation Change in Fixed Assets Change in W.C. Interest 37,605 22249.2 (17,000) (2,626) 6,796
2012E 42,553 28,064 (14,000) (2,941) 7,471
2013E 49,365 34,533 (14,000) (3,294) 7,471
2014E 56,679 41,701 (16,410) (5,297) 7,471
2015E 66,138 49,719 (19,166) (6,061) 7,471
2016E 77,534 58,762 (22,488) (7,306) 7,471
Terminal Value
Projected Cash Flows Discounted Cash Flow
49,035 49,035
61,146 53,126
74,075 55,918
84,144 55,188
98,100 55,903
1,13,972 56,429
24,60,286 12,18,118
WACC-Target Price
Cost of Equity Using CAPM Model Rf 8.24% 10 year Benchmark Gsec Yield Rm 15% Expected Market Return
?
1.1128
R Equity
15.76%
10 Year Benchmark G Sec Yield
8.24%
AAA Corporate Bond Spread
1.23%
Tax Rate
30.00%
Total Debt (2011) Total Equity (2011)
83241.2 10,56,970 Market Capitalisation as on 24th June
WACC
15.10%
• • • • • • • •
Terminal Value at the end of FY 2016 Assumption: Free cash flow growth falls to 10% after 2016 and remains constant thereafter forever G FCF 10% R WACC 15.10% Terminal Value (Rs. Mn) 24,60,286 Enterprise Value (Rs Mn) 15,43,718 Value of Equity (Rs. Mn.) 14,60,710 Estimated Price (Rs) 2,413.60
doc_972773822.ppt
EQUITY ANALYSIS OF LARSEN & TOUBRO
Equity Analysis: Larsen & Toubro Limited
Industry: Engineering
Presented By:
Jitendra Kumar
June 2011
Industry Overview
• • The Engineering sector is the largest in the overall industrial sectors in India. It is a diverse industry with a number of segments, and can be broadly categorized into two segments, namely, heavy engineering and light engineering. Approximately 15-20 %growth rate in industry expected (LNT growing @ 25%) Most of the leading players are engaged in the production of heavy engineering goods and mainly produces high-value products using high-end technology. Requirement of high level of capital investment poses as a major entry barrier. Leading players in this industry are L&T, ABB, BHEL, Siemens, Thermax, Crompton Greaves, Voltas The light engineering goods segment, on the other hand, uses medium to low-end technology. Entry barrier is low on account of the comparatively lower requirement of capital and technology. The demand in the engineering sector to remain to be healthy primarily on account of the Government’s increased thrust on infrastructure development. Industry margins growing @ 12-15% Industry profitability approximately 10-14%
• •
• •
• • •
Company Overview
• Larsen & Toubro Limited (L&T) is a technology, engineering, power, construction and manufacturing company. It is one of the largest and most respected companies in India's private sector with a strong revenue growth of 25% and order inflow growth of 15-20% in FY2012. Leadership position in all its major lines of business. L&T has an international presence, with a global spread of offices and factories. Has strong footprint in the Gulf and in China.
•
• •
Subsidiaries • Larsen & Toubro Komatsu Limited • Larsen & Toubro Finance • Larsen & Toubro Infrastructure Finance • L&T – Integrated Engineering Services (IES) • Larsen & Toubro Valves Business Group
Firm's competitive position:
• • • • • Impact on margins: EBITDA margin stable at 15.2% and strong inflows of Rs 303 bn. Capital Investment Requirement: L&T reported a strong balance sheet at the end FY 2011 with a marginal deterioration in working capita levels & gross debt to equity of 0.33X. L&T increased its investments in its subsidiaries and associates by 29.6bn to 106.4 bn at end FY2011 from FY2010-end level of Rs. 77bn primarily led by(1) buy out of PE stake in L&T IDPL and investment in other development projects of Rs. 10.7 bn (2) Increase in investment in L&T finance and L&T infrastructure finance by Rs. 6.8 bn. (3) Increase in investment in L&T power development to the tune of about Rs. 4.6 bn. Growth Rates: Management guided for strong revenue (25%) and inflows (15-20%) growth in FY2012 end. Our estimates build a marginal order inflow growth of 3% and strong revenue growth of 24% for FY2012 end.
• • • •
Key Parameters
Source: Kotak Institutional Equities’ research report
Summary Profit & Loss a/c
P & Loss statement for L & T (standalone), ends, 2011-2016E (Rs mn)
2011 Net sales and services Other operating income Net operating revenues 4,42,812 4,135 4,46,947
2012E 5,26,515 4,754 5,31,269
2013E 6,25,008 5,466 6,30,474
2014E 7,32,698 6,286 7,38,984
2015E 8,55,907 7,229 8,63,136
2016E 10,04,427 8,313 10,12,741
Direct costs
Gross profit S,G&A expenses Salaries and wages EBITDA Interest expense Depreciation EBIT Other income PBT Taxes Tax rate (%) Net income Extraordinaries
(3,44,567)
1,02,381 (17,431) (28,657) 56,293 (6,796) (4,972) 44,524 11,771 56,295 (18,690) (33.2) 37,605 -
(4,09,872)
1,21,398 (19,126) (36,031) 66,241 (7,471) (5,815) 52,955 10,746 63,702 (21,149) (33.2) 42,553 -
(4,86,443)
1,44,031 (22,697) (43,647) 77,687 (7,471) (6,469) 63,747 10,152 73,899 (24,535) (33.2) 49,365 -
(5,71,886)
1,67,098 (26,603) (51,159) 89,336 (7,471) (7,168) 74,697 10,152 84,849 (28,170) (33.2) 56,679 -
(6,67,965)
1,95,171 (31,073) (59,754) 1,04,344 (7,471) (8,018) 88,856 10,152 99,008 (32,871) (33.2) 66,138 -
(7,83,741)
2,29,000 (36,459) (70,111) 1,22,430 (7,471) (9,043) 1,05,917 10,152 1,16,069 (38,535) (33.2) 77,534 -
Summary Balance Sheet
2011 Liabilities Equity share capital Reserves and surplus Total Equity Reval reserves Secured loans 1,210 2,14,388 2,15,598 233 9,557 1,210 2,47,028 2,48,238 233 9,557 1,210 2,86,480 2,87,690 233 9,557 1,210 3,32,541 3,33,752 233 9,557 1,210 3,88,062 3,89,272 233 9,557 1,210 4,54,979 4,56,189 233 9,557 2012E 2013E 2014E 2015E 2016E
Unsecured loans
Total Liabilities
73,451
2,98,839
73,451
3,31,479
73,451
3,70,931
73,451
4,16,993
73,451
4,72,513
73,451
5,39,430
Assets Gross fixed assets Accumulated Depreciation 87,931 (22,249) 1,01,931 (28,064) 1,15,931 (34,533) 1,32,341 (41,701) 1,51,507 (49,719) 1,73,996 (58,762)
Balance sheet Cont…
Net fixed assets Capital work-in-progress Intangible assets Investments 65,682 5,000 1,427 1,48,042 73,868 5,000 1,427 1,57,529 81,398 5,000 1,427 1,67,114 90,639 5,000 1,427 1,85,079 1,01,788 5,000 1,427 2,07,929 1,15,234 5,000 1,427 2,35,546
Deferred tax assets Deferred revenue items Cash and Bank balances Inventory Debtors
(774) 7,406 84,923 1,45,582
(774) 6,969 1,00,976 1,73,101
(774) 11,011 1,19,865 2,05,482
(774) 11,562 1,40,517 2,40,887
(774) 12,140 1,64,147 2,81,394
(774) 12,747 1,92,630 3,30,223
Advances
Other current assets
72,791
11
86,550
11
1,02,741
11
1,20,443
11
1,40,697
11
1,65,111
11
Creditors
Advances fromcustomers Other current liabilities Provisions Net working capital (excash)
97,055
1,09,187 500 24,510
1,15,401
1,29,826 500 27,451
1,36,988
1,54,112 500 30,745
1,60,591
1,80,665 500 36,042
1,87,596
2,11,046 500 42,103
2,20,148
2,47,667 500 49,409
72,056
87,461
1,05,754
1,24,060
1,45,004
1,70,251
Miscallenous expenditure
Total Assets 2,98,839 3,31,479 3,70,931 4,16,993 4,72,514 5,39,430
Discounted Cash Flow
Cash Flow Working
2011 PAT Depreciation Change in Fixed Assets Change in W.C. Interest 37,605 22249.2 (17,000) (2,626) 6,796
2012E 42,553 28,064 (14,000) (2,941) 7,471
2013E 49,365 34,533 (14,000) (3,294) 7,471
2014E 56,679 41,701 (16,410) (5,297) 7,471
2015E 66,138 49,719 (19,166) (6,061) 7,471
2016E 77,534 58,762 (22,488) (7,306) 7,471
Terminal Value
Projected Cash Flows Discounted Cash Flow
49,035 49,035
61,146 53,126
74,075 55,918
84,144 55,188
98,100 55,903
1,13,972 56,429
24,60,286 12,18,118
WACC-Target Price
Cost of Equity Using CAPM Model Rf 8.24% 10 year Benchmark Gsec Yield Rm 15% Expected Market Return
?
1.1128
R Equity
15.76%
10 Year Benchmark G Sec Yield
8.24%
AAA Corporate Bond Spread
1.23%
Tax Rate
30.00%
Total Debt (2011) Total Equity (2011)
83241.2 10,56,970 Market Capitalisation as on 24th June
WACC
15.10%
• • • • • • • •
Terminal Value at the end of FY 2016 Assumption: Free cash flow growth falls to 10% after 2016 and remains constant thereafter forever G FCF 10% R WACC 15.10% Terminal Value (Rs. Mn) 24,60,286 Enterprise Value (Rs Mn) 15,43,718 Value of Equity (Rs. Mn.) 14,60,710 Estimated Price (Rs) 2,413.60
doc_972773822.ppt