Equity Valuation

1. Equity Analysis: Larsen &
Toubro Limited
Industry: Engineering
Presented By:
Jitendra Kumar
June 2011

2. 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%

3. 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

4. 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.

5. Key Parameters
Source: Kotak Institutional Equities’ research report

6. Summary Profit & Loss a/c
P & Loss statement for L &
T (standalone), ends,
2011-2016E (Rs mn)
2011 2012E 2013E 2014E 2015E 2016E
Net sales and services 4,42,812 5,26,515 6,25,008 7,32,698 8,55,907 10,04,427
Other operating income 4,135 4,754 5,466 6,286 7,229 8,313
Net operating revenues 4,46,947 5,31,269 6,30,474 7,38,984 8,63,136 10,12,741
Direct costs (3,44,567) (4,09,872) (4,86,443) (5,71,886) (6,67,965) (7,83,741)
Gross profit 1,02,381 1,21,398 1,44,031 1,67,098 1,95,171 2,29,000
S,G&A expenses (17,431) (19,126) (22,697) (26,603) (31,073) (36,459)
Salaries and wages (28,657) (36,031) (43,647) (51,159) (59,754) (70,111)
EBITDA 56,293 66,241 77,687 89,336 1,04,344 1,22,430
Interest expense (6,796) (7,471) (7,471) (7,471) (7,471) (7,471)
Depreciation (4,972) (5,815) (6,469) (7,168) (8,018) (9,043)
EBIT 44,524 52,955 63,747 74,697 88,856 1,05,917
Other income 11,771 10,746 10,152 10,152 10,152 10,152
PBT 56,295 63,702 73,899 84,849 99,008 1,16,069
Taxes (18,690) (21,149) (24,535) (28,170) (32,871) (38,535)
Tax rate (%) (33.2) (33.2) (33.2) (33.2) (33.2) (33.2)
Net income 37,605 42,553 49,365 56,679 66,138 77,534
Extraordinaries - - - - - -
Reported net income 37,605 42,553 49,365 56,679 66,138 77,534

7. Summary Balance Sheet
2011 2012E 2013E 2014E 2015E 2016E
Liabilities
Equity share capital 1,210 1,210 1,210 1,210 1,210 1,210
Reserves and surplus 2,14,388 2,47,028 2,86,480 3,32,541 3,88,062 4,54,979
Total Equity 2,15,598 2,48,238 2,87,690 3,33,752 3,89,272 4,56,189
Reval reserves 233 233 233 233 233 233
Secured loans 9,557 9,557 9,557 9,557 9,557 9,557
Unsecured loans 73,451 73,451 73,451 73,451 73,451 73,451
Total Liabilities 2,98,839 3,31,479 3,70,931 4,16,993 4,72,513 5,39,430
Assets
Gross fixed assets 87,931 1,01,931 1,15,931 1,32,341 1,51,507 1,73,996
Accumulated Depreciation (22,249) (28,064) (34,533) (41,701) (49,719) (58,762)

8. Balance sheet Cont…
Net fixed assets 65,682 73,868 81,398 90,639 1,01,788 1,15,234
Capital work-in-progress 5,000 5,000 5,000 5,000 5,000 5,000
Intangible assets 1,427 1,427 1,427 1,427 1,427 1,427
Investments 1,48,042 1,57,529 1,67,114 1,85,079 2,07,929 2,35,546
Deferred tax assets (774) (774) (774) (774) (774) (774)
Deferred revenue items - - - - - -
Cash and Bank balances 7,406 6,969 11,011 11,562 12,140 12,747
Inventory 84,923 1,00,976 1,19,865 1,40,517 1,64,147 1,92,630
Debtors 1,45,582 1,73,101 2,05,482 2,40,887 2,81,394 3,30,223
Advances 72,791 86,550 1,02,741 1,20,443 1,40,697 1,65,111
Other current assets 11 11 11 11 11 11
Creditors 97,055 1,15,401 1,36,988 1,60,591 1,87,596 2,20,148
Advances fromcustomers 1,09,187 1,29,826 1,54,112 1,80,665 2,11,046 2,47,667
Other current liabilities 500 500 500 500 500 500
Provisions 24,510 27,451 30,745 36,042 42,103 49,409
Net working capital (ex-
cash) 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

9. Discounted Cash Flow
Cash Flow Working
2011 2012E 2013E 2014E 2015E 2016E Terminal Value
PAT 37,605 42,553 49,365 56,679 66,138 77,534
Depreciation 22249.2 28,064 34,533 41,701 49,719 58,762
Change in Fixed
Assets (17,000) (14,000) (14,000) (16,410) (19,166) (22,488)
Change in W.C. (2,626) (2,941) (3,294) (5,297) (6,061) (7,306)
Interest 6,796 7,471 7,471 7,471 7,471 7,471
Projected Cash Flows 49,035 61,146 74,075 84,144 98,100 1,13,972 24,60,286
Discounted Cash Flow 49,035 53,126 55,918 55,188 55,903 56,429 12,18,118

10. WACC-Target Price
Cost of Equity Using CAPM Model
Rf 8.24% 10 year Benchmark Gsec Yield
Rm 15% Expected Market Return
β 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) 83241.2
Total Equity (2011) 10,56,970 Market Capitalisation as on 24th June
WACC 15.10%

11. • 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