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.