Larsen & Toubro
BSE SENSEX
35,160
S&P CNX
10,739
2 May 2018
Update
| Sector:
Capital Goods
CMP: INR1,400
TP: INR1,690 (+21%)
In line with L&T’s ‘Lakshya’ programme to divest non-core assets
Buy
Divests E&A business to Schneider Electric for INR140b
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
LT IN
1,399.4
1470 / 1108
0/9/3
1931.2
29.7
3243.0
100.0
Financials Snapshot (INR b)
2018 2019E
Y/E Mar
Net Sales
1,201 1,365
EBITDA
132.5 160.6
PAT
68.0
80.6
EPS (INR)
48.6
57.6
Gr. (%)
14.8
18.5
BV/Sh (INR)
391.3 430.2
RoE (%)
13.0
14.0
RoCE (%)
8.3
9.9
P/E (x)
28.4
24.0
P/BV (x)
3.8
3.5
2020E
1,455
170.0
97.6
69.8
21.2
558.0
14.1
9.9
19.8
3.2
L&T signs agreement with Schneider Electric for sale of its Electrical &
Automation segment.
L&T has entered into a definitive agreement with Schneider
Electric (India) Private Limited and Schneider Electric JV Holdings Limited for a
divestment of its Electrical and Automation (E&A) segment for a cash consideration
of INR140b. The deal does not include the marine switchgear and Servowatch
Systems (primarily into marine automation) in the E&A segment. The deal is
expected to close in 18 months from the date of signing of the agreement (1
st
May,
2018) and is subject to receipt of the required regulatory approvals. The E&A
segment accounted for ~4-5% of consolidated sales in FY18e and ~6% of
consolidated EBITDA (See Exhibit 1 for detailed P/L of the E&A segment). The E&A
segment is a debt free business with strong cash flow generation and EBITDA
margins in the 14-15% margin range
E&A segment primarily into switchgears and automation products; amongst the
largest player in LV switchgear in India.
The E&A business comprises two strategic
Business Groups (SBGs) – Products SBG and Projects SBG and offers a wide range of
low and medium voltage switchgear, electrical systems, marine switchgear,
industrial/ building automation solutions and metering solutions. Its key
competitors include ABB, Siemens, Legrand, HPL Electric and Havells India. Its
manufacturing facilities are located at Navi Mumbai, Ahmednagar, Vadodara,
Coimbatore and Mysore in India as well as in Saudi Arabia, UAE, Kuwait, Malaysia,
Indonesia and the UK.
Sale of the E&A segment for a cash consideration of INR140b.
At INR140b, the
E&A segment is valued at 2.7x/2.6x/2.5x FY18e/19e/20e sales and 33x/31x/29x
FY18e/19e/20e EPS. This is largely in line with its listed peers such as Havells, ABB,
and Siemens (See Exhibit 2 and Exhibit 4 for valuations of the segment vs. listed
peers).
Revise up estimates for L&T in FY20/21 to factor in the E&A segment sale.
We
have assumed that the deal achieves closure in 1H20 (18 months from signing of
the agreement). In our view, of the INR112b of cash consideration to be received
by L&T post tax, a portion would be used to retire debt (~INR100b) while the
balance (INR12b) used for funding growth in subsidiaries/strategic acquisitions.
We revise up our FY20/21e EPS by 2% each and our SOTP based price target to
INR1, 690 (E&C business at 24x FY20E EPS, to which we add INR520 for
subsidiaries). Key risks to our rating include (a) a sharp slowdown in government
spending and (b) a sharp fall in oil prices in the Middle East.
Shareholding pattern (%)
As On
Mar-18 Dec-17 Mar-17
Promoter
0.0
0.0
0.0
DII
38.5
40.1
38.8
FII
20.5
18.5
19.2
Others
41.0
41.4
42.1
FII Includes depository receipts
Stock Performance (1-year)
Larsen & Toubro
Sensex - Rebased
1,525
1,350
1,175
1,000
Ankur Sharma – Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 6129 1556
Amit Shah – Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 6129 1543
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Larsen & Toubro
Exhibit 1: L&T E&A segment P&L
Description
Sales
YoY (%)
EBITDA
Margin (%)
Depreciation
PBT
Tax
PAT
FY14
45,500
6,440
14.2%
(1,016)
5,424
(1,790)
3,634
FY15
47,900
5%
7,100
14.8%
(1,608)
5,492
(1,812)
3,680
FY16
46,500
-3%
5,788
12.4%
(1,461)
4,327
(1,428)
2,899
FY17
46,500
0%
7,022
15.1%
(1,510)
5,512
(1,653)
3,858
FY18
51,680
11%
7,703
14.9%
(1,586)
6,117
(1,835)
4,282
FY19E
54,317
5%
8,116
14.9%
(1,665)
6,451
(1,935)
4,516
FY20E
57,093
5%
8,553
15.0%
(1,748)
6,805
(2,042)
4,764
Source: Company, MOSL
Exhibit 2: Valuations for the E&A segment at INR140b cash consideration
Valuations
P/Sales
EV/EBITDA
P/E
P/B
FY17
3.0
19.9
36.3
5.8
FY18
2.7
18.2
32.7
5.7
FY19
2.6
17.3
31.0
5.4
FY20
2.5
16.4
29.4
5.2
Source: : Company, MOSL
Exhibit 3: E&A segment pre-tax ROCE
Description
Segmental Assets
Less : Liabilities
Capital Employed
Pre- tax ROCE (%)
FY15
47,926
(19,069)
28,856
19%
FY16
44,722
(17,743)
26,978
16%
FY17
43,643
(19,357)
24,286
23%
FY18
43,032
(18,612)
24,420
25%
Source: Company, MOSL
Exhibit 4: Comparison of valuations for the E&A segment to listed peers
Description
L&T Electrical and Automation
Havells
ABB
Siemens
Median
FY17
3.0
5.6
3.3
3.7
3.5
Price to Sales
FY18
FY19
2.7
2.6
4.2
1.8
3.1
2.5
2.9
2.8
3.0
2.5
FY20
2.5
1.5
2.2
2.5
2.3
FY17
36.3
57.2
76.7
56.7
57.0
Price to Earnings
FY18
FY19
32.7
31.0
49.1
40.0
68.4
46.3
36.9
32.4
43.0
36.2
FY20
29.4
32.2
39.3
28.9
30.8
Source: Company, MOSL
Exhibit 5: Change in estimates incorporating the sale of the E&A segment
New Estimates
FY18
FY19
Sales
1,201,131 1,364,520
EBITDA
132,515
160,611
Margin (%)
11.0%
11.8%
Less: Interest
(15,185)
(30,614)
Less: Depreciation
(19,915)
(22,093)
Add: Other income
13,985
19,917
PBT
111,401
127,821
Tax
(32,306)
(35,790)
Rate (%)
29%
28%
PAT before minority interest
79,094
92,031
Minority and Share of profit of associate (11,124)
(11,475)
PAT
67,970
80,556
Description
Old Estimates
FY20
FY21
FY20
FY21
1,455,278 1,561,609 1,483,825
1,621,626
169,951 187,844
174,228
196,828
11.7%
12.0%
11.7%
12.1%
(25,083) (19,552)
(30,083)
(29,552)
(20,691) (20,396)
(21,741)
(22,099)
24,612
31,299
24,220
30,073
148,788 179,195
146,623
175,249
(41,661) (50,175)
(41,054)
(49,070)
28%
28%
28%
28%
107,127 129,020
105,568
126,179
(9,490) (8,290)
(9,490)
(8,290)
97,637 120,730
96,078
117,889
Change in Estimates
FY20
FY21
-1.9%
-3.7%
-2.5%
-4.6%
-0.5%
-0.9%
-16.6%
-33.8%
-4.8%
-7.7%
1.6%
4.1%
1.5%
2.3%
1.5%
2.3%
0.0%
0.0%
1.5%
2.3%
0.0%
0.0%
1.6%
2.4%
Source: MOSL, Company
2 May 2018
2

Larsen & Toubro
Well positioned to benefit from economic recovery
Maintaining Buy
A foreword on the long term industry view:
The capex cycle in India peaked in FY13
when share of private sector stood at a high of ~60% of total projects under
implementation. Since then the share of the private sector has been declining and is
now down to 40% - in the meantime, government has stepped up infrastructure
spending to offset the decline in private spending. This trend is starting to reverse -
private sector project sanction too saw a surge of 92% to INR1.8t in FY17 after
declining for 6 years and we expect ordering and capex to follow.
L&T in that industry backdrop
Five year strategic plan ‘Lakshya FY16-21’ in place:
L&T has put in place its five year
strategic plan “Lakshya’ which focuses on a) Doubling sales to INR2t by FY21 b)
Improving margins (ex-services) from 10% in FY16 to 11.2% in FY21. c) Value
unlocking either by listing the asset or by divesting non-core assets d) Improve RoE’s
from 12% in FY16 to 18% in FY21. e) Bring down the working capital from 24% in
FY16 to 18% by FY21. Successful implementation of the strategic plan would ensure
healthy operational growth for L&T.
Recent operational performance provides confidence on successful
implementation of Lakshya:
L&T’s efforts to successfully implement Lakshya are
visible in its recent performance on multiple fronts. L&T has been able to
successfully bring down the net working capital to 20% in 2QFY18 from 24% in FY16.
B) Operating margins (ex-services) have shown signs of pick up (11.2% in2QFY18). C)
Listing of L&T Finance, IT and technology services and divestment of non-core assets
like ( L&T cutting tools, EWAC alloys, L&T general insurance, Seawood retail mall,
south city projects)
We expect L&T to register 10% revenue growth over the FY17-21E with margin
improvement of 200bps over the same period to 12.3%. Company’s conscious
efforts to bag orders with better margin profile, and cost control measures should
ensure margin improvement going ahead.
What it means for the target price
3-year view:
Over the three year time frame we have valued L&T’s core E&C
business at 25x FY21E EPS (higher end of the last 5 year trading band of 20-25x given
our premise of pick up in the private capex cycle supported by the government
capex) and other business with historical industry average in which they operate
which works out to INR1,820. This implies returns CAGR of 13% at L&T.
1-year view:
While L&T has cut its order inflow guidance from earlier 10-12% to
Zero to marginally positive for FY18. Order announcement from L&T for 3QFY18
(INR380b) is encouraging and can potentially lead to higher single digit order inflow
growth for fY18. Furthermore, L&T has maintained its revenue growth guidance of
10-12% and margin improvement guidance of 25bps for FY18. Given operational
performance improvement, better ordering visibility given pickup in economic
activity, we have valued L&T on SoTP basis with target price of INR1,690.
2 May 2018
3

Larsen & Toubro
Key triggers
Pick-up in private capex cycle supported by government capex
Timely execution of strong order backlog that company has
Divestment of the non-core assets and net working capital cycle improvement
Key risk factors
Delay in pickup of capex cycle recovery
Delay in timely execution of the order backlog in hand
Deterioration in the operational parameters
Target price of INR1690; maintain Buy
L&T is exposed to several levers across business/geographic segments and has
emerged as the E&C partner of choice in India, which provides a robust
foundation to capitalize on the next leg of investment cycle.
Under its new five-year strategic plan to FY21, LT aims to: (a) grow sales at a 12-
15% CAGR to reach INR2t by 2021; (b) increase margins to 11.2%, +120bp over
FY16, driven by higher profitability in key manufacturing verticals (power,
process, forgings and Katupalli yard) and hydrocarbons; (c) unlock value via
asset sales to drive ROE to 18% from 12% in FY16; and (d) reduce working
capital to 18% of sales from 24% currently.
Manufacturing businesses (like Shipyard, Power BTG, and Forgings) also present
interesting possibilities in the longer term. Many of these businesses are difficult
to replicate and L&T is strongly positioned as a dominant player.
Exhibit 6: L&T SOTP
Description
Construction Business
L&T Standalone
L&T Hydrocarbons
Service Segments
L&T Infotech (84.6% stake)
L&T Technology Sevices(90% stake)
Method
Mar'20E PER (x)
Mar'20E PER (x)
Mar'20E PER (x)
Mar'20E PER (x)
Valuation Value
Value
multiple (INR b) (INR/sh) Rationale
24.0
24.0
12.0
12.0
3.0
1.5
15.0
0.5
0.5
1.0
15.0
1.0
1.0
1,631
204
152
97
232
0
41
23
32
31
30
31
4
2,511
1,165 Higher end of 5 year trading band of 20-25x
146
108
70
166
0
29
17
11
22
21
22
3
-94
1,688
At par to mid tier IT companies; excl. stake
sold via OFS
At par to mid tier IT companies excl. stake sold
via OFS
3x P/BV on FY19
Finance Sevices (67% stake)
Mar '20E PBV (x)
Sapura Shipping
Mar '20E PBV (x)
L&T Realty
Mar'20E PER (x)
Asset Ownership / Project Developer
IDPL - Roads, Transmission
Mar '20E PBV (x)
Hyderabad Metro
Mar '20E PBV (x)
Power Development Projects
Mar '20E PBV (x)
Manufacturing Ventures
Power Equipment
Shipbuilding
Special Steel and Heavy Forgings
Less: Holdco Discount of 20%
Total
Mar'20E PER (x)
Mar '20E PBV (x)
Mar '20E PBV (x)
0.5x Book Value to capture the losses
To account for losses in the Metro business
At Book Value, given Case 2 bid
Expect industry project awards to sustain at 5-
7GW pa
Increased possibility of Defence (Naval) orders
Possibility of Nuclear project awards to
commence in FY19
2 May 2018
4

Larsen & Toubro
Financials and Valuations
Income Statement
Y/E March
Net Revenues
Growth Rate (%)
Manufacturing Expenses
Staff Cost
S G &A Expenses
EBITDA
Change (%)
Adj EBIDTA
EBITDA Margin (%)
Depreciation
EBIT
Net Interest
Other Income
Profit before Tax
Tax
Effective Tax Rate (%)
Reported Profit
Less:Addl tax on dividend by Subs
Less: Minority Interest
Add: Profits of Associates
EO Adjustments
Adjusted Profit
Growth (%)
Cons. Profit (Reported)
2013
744,980
16.0
546,888
62,446
36,359
99,287
14.3
99,287
13.3
16,371
82,917
21,243
10,557
72,231
23,790
32.9
51,808
130
722
384
3,368
47,973
5.3
51,341
2014
851,284
14.3
616,948
80,276
46,517
107,543
8.3
107,543
12.6
14,458
93,085
31,414
9,819
71,490
26,076
36.5
48,817
208
-382
93
3,402
45,680
-4.8
49,083
2015
920,046
8.1
672,937
79,222
54,531
113,356
5.4
113,356
12.3
26,225
87,131
28,507
10,072
68,696
22,836
33.2
49,337
0
1,710
21
3,477
44,171
-3.3
47,648
2016
1,019,753
10.8
724,089
133,308
57,728
104,628
-7.7
104,628
10.3
17,867
86,761
16,551
9,044
79,254
24,848
31.4
55,348
0
3,118
-9,902
942
41,387
-6.3
42,329
2017
1,100,110
7.9
780,393
138,531
70,440
110,747
5.8
110,747
10.1
23,699
87,048
13,398
14,010
87,659
20,066
22.9
68,808
0
4,443
-3,953
1,214
59,198
43.0
60,412
2018E
1,201,131
9.2
856,138
147,410
65,068
132,515
19.7
132,515
11.0
19,915
112,600
15,185
13,985
111,401
32,306
29.0
80,324
0
6,096
-5,028
1,230
67,970
14.8
69,200
2019E
1,364,520
13.6
968,126
167,462
68,322
160,611
21.2
160,611
11.8
22,093
138,518
30,614
19,917
127,821
35,790
28.0
92,031
0
6,478
-4,997
0
80,556
18.5
80,556
(INR m)
2020E
1,455,278
6.7
1,034,988
178,601
71,738
169,951
5.8
169,951
11.7
20,691
149,260
25,083
24,612
148,788
41,661
28.0
219,127
0
7,050
-2,441
112,000
97,637
21.2
209,637
Balance Sheet
Y/E March
Equity Capital
Reserves and Surplus
Net Worth
Debt
Deferred Tax Liability
Minority Interest
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
2013
1,231
337,366
338,597
619,936
1,837
26,529
986,899
379,822
75,670
113,068
417,220
87,675
51,874
230,149
35,715
84,536
201,930
924,213
442,209
482,004
986,899
2014
1,854
375,262
377,116
801,529
3,375
31,792
1,213,812
411,347
88,824
143,237
465,760
81,090
55,275
263,846
40,966
134,755
254,934
1,150,574
483,612
666,962
1,213,812
2015E
1,859
410,222
412,081
767,297
-3,504
19,706
1,195,580
168,322
6,555
103,416
265,184
113,089
59,812
222,544
44,126
13,491
416,488
1,313,997
496,690
817,307
1,195,579
2016
1,863
439,941
441,804
881,352
-7,364
28,928
1,344,719
167,706
23,518
151,651
295,839
110,791
48,542
260,250
53,899
16,889
481,865
1,527,390
589,299
938,092
1,344,722
2017E
1,866
500,299
502,165
939,761
-11,252
35,636
1,466,310
171,779
38,375
167,374
300,778
197,530
41,397
279,696
55,725
19,547
488,977
1,605,954
637,950
968,004
1,466,312
2018E
1,866
545,684
547,550
1,041,696
-11,252
41,732
1,619,726
181,779
58,290
167,374
290,864
217,530
45,198
328,415
129,763
21,342
550,333
1,807,865
696,532
1,111,332
1,619,726
2019E
1,866
600,186
602,052
1,044,613
-11,252
48,210
1,683,622
171,779
80,383
167,374
258,770
217,530
51,347
373,090
179,469
24,245
625,194
1,998,603
791,281
1,207,322
1,683,623
(INR m)
2020E
1,866
778,959
780,825
947,779
-11,252
55,259
1,772,612
161,779
101,074
167,374
228,079
217,530
54,762
397,905
267,660
25,857
666,778
2,170,914
843,911
1,327,003
1,772,612
2 May 2018
5

Larsen & Toubro
Financials and Valuations
Ratios
Y/E March
Basic (INR)
Standalone EPS Adj
Growth (%)
Consolidated EPS Adj
Growth (%)
Con. EPS (Fully Diluted)
Growth (%)
Cash EPS
Book Value
Dividend Per Share
Div. Payout (Incl. Div Tax ) %
Valuation (x)
P/E (Standalone)
P/E (Consolidated)
P/E (Consolidated) (Fully Diluted)
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)
2013
32.6
3.7
34.3
5.3
34.3
5.3
46.0
242.0
7.6
22.2
2014
35.0
7.4
32.6
-4.8
32.6
42.8
43.0
269.5
9.4
28.9
2015
33.6
-4.2
31.6
-3.3
31.6
-3.3
50.3
294.5
8.7
27.5
2016
31.7
-5.5
29.6
-6.3
29.6
-6.3
42.3
315.7
12.5
42.3
2017E
32.6
2.7
42.3
43.0
42.3
43.0
59.2
358.8
14.0
33.2
2018E
39.3
20.7
48.6
14.8
48.6
14.8
62.8
391.3
14.2
29.1
2019E
45.4
15.4
57.6
18.5
57.6
18.5
73.4
430.2
16.3
28.4
2020E
53.7
18.5
69.8
21.2
69.8
21.2
84.6
558.0
19.3
27.7
42.4
32.6
32.6
23.3
25.4
2.7
4.4
1.0
15.3
8.3
12.8
7.2
11.2
7.7
9.7
7.4
12.5
8.0
35.1
28.4
28.4
22.0
21.5
2.6
3.8
1.0
13.0
8.3
35.1
24.0
24.0
18.8
17.4
2.4
3.5
1.2
14.0
9.9
30.4
19.8
19.8
16.3
15.4
2.0
3.2
1.4
14.1
9.9
112.8
25.4
0.8
2.1
1.0
113.1
23.7
0.7
2.4
1.2
88.3
23.7
0.8
2.6
0.8
93.2
17.4
0.8
2.6
0.8
92.8
13.7
0.8
2.5
0.7
99.8
13.7
0.7
2.6
0.8
99.8
13.7
0.8
2.5
0.7
99.8
13.7
0.8
2.6
0.4
Cash Flow Statement
Y/E March
PBT before EO Items
Add : Depreciation
Change in diff tax liability
(Inc)/Dec in WC
CF from Operations
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Advances to subs
CF from Investments
(Inc)/Dec in Net Worth
(Inc)/Dec in Debt
Change in Minority Interest
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2013
52,057
16,371
-43,158
-84,641
-59,372
-90,670
-150,042
220
-90,237
5,057
148,436
8,994
-12,385
150,102
493
35,222
35,715
2014
49,020
14,458
1,538
-179,708
-114,692
-62,998
-177,690
6,585
-56,413
4,821
181,593
5,263
-15,322
176,355
5,251
35,715
40,966
2015
47,648
26,225
-6,879
-147,185
-80,191
174,351
94,161
-31,999
142,352
1,419
-34,233
-12,086
-14,103
-59,002
3,160
40,966
44,126
2016
42,329
17,867
-3,860
-111,011
-54,675
-48,523
-103,198
2,298
-46,225
7,731
114,058
9,222
-20,337
110,674
9,774
44,126
53,900
2017E
60,412
23,699
-3,888
-28,086
52,138
-28,638
23,499
-86,740
-115,378
22,768
58,408
6,708
-22,818
65,065
1,825
53,900
55,725
2018E
69,200
19,915
0
-69,291
19,824
-10,000
9,824
-20,000
-30,000
-1,230
101,933
6,096
-22,586
84,214
74,038
55,725
129,763
2019E
80,556
22,093
0
-46,283
56,366
10,000
66,366
0
10,000
0
2,917
6,478
-26,055
-16,660
49,707
129,763
179,469
(INR m)
2020E
209,637
20,691
0
-31,490
198,838
10,000
208,838
0
10,000
0
-96,834
7,050
-30,863
-120,648
88,191
179,469
267,660
2 May 2018
6

Larsen & Toubro
NOTES
2 May 2018
7

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Larsen & Toubro
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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Disclosure of Interest Statement
Analyst ownership of the stock
Larsen & Toubro
No
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2 May 2018
8