Date: 8 June, 2018
Price: Rs. 1343.95
Larsen & Toubro Limited (“L&T” or the “Company”) has business interests in sectors ranging from engineering, construction, manufacturing, information technology and financial services. It has a dominant presence in India’s infrastructure, power, hydrocarbon, machinery and railway-related projects.
Diversified Business Segments
- Infrastructure segment comprises engineering and construction of building and factories, transportation infrastructure, heavy civil infrastructure, power transmission & distribution and water & renewable energy projects.
- Power segment comprises turnkey solutions for coal-based and gas-based thermal power plants including power generation equipment.
- Metallurgical & Material Handling segment comprises turnkey solutions for ferrous (iron & steel) and non-ferrous (aluminium, copper, lead & zinc) metal industries, bulk material & ash handling systems in power, port, steel and mining sector including manufacture and sale of industrial machinery and equipment.
- Heavy Engineering segment comprises manufacture and supply of custom designed, engineered equipment & systems to core sector industries like refinery, petrochemical, chemical, oil & gas, aerospace and defence.
- Electrical & Automation segment comprises manufacture and sale of low and medium voltage switchgear components, custom built low and medium voltage switchboards, electronic energy meters systems and control & automation products.**
**On 1st May, 2018, Larsen Toubro 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 segment for a cash consideration of Rs. 14,000 Cr.
The deal is expected to close in 18 months from the date of signing of the agreement (1st May, 2018) and is subject to receipt of the required regulatory approvals. The E&A segment accounted for ~4-5% of consolidated sales. The E&A segment is a debt free business with strong cash flow generation.
- Other segmentincludes realty, shipbuilding, marketing and servicing of construction & mining machinery, manufacture and sale of rubber processing machinery
Strong Order Book
Larsen & Toubro has bagged many orders in promising segments such as urban infrastructure, water, civil engineering, hydrocarbons and power in the past year.
The Company’s consolidated order book stands at Rs. 2,707 billion as at December 31, 2017, higher by 5% on a y-o-y basis with international order book constituting 25% of the order book. The increase in the order book lends long term earnings visibility.
Strong Financial Position
For 9 months ended December 2017, income from operations increased by 8.20 % to Rs. 79,184 Cr. from Rs. 73,182.99 Cr. and EBITDA increased by 16 % to Rs. 13,603.24Cr. from Rs. 11,762.92 Cr. The Company has reserves in excess of Rs. 40,723.16 Cr.
At CMP of Rs. 1,343.95 (8th June, 2018), Larsen & Toubro is trading at a P/E of 23.74x. The Company has paid consistent dividend. The Company has consistently paid a dividend in the range of Rs. 12 – Rs.15 over the past 4-5 years and has maintained an average dividend yield of 1.20% over the last 5 financial years.
Proxy play on India infrastructure story
Government Initiative – The Indian Infrastructure sector is likely to get major boost from the Government’s focus on development of infrastructure in India. In the Union Budget for 2018-19, total investment in infrastructure is increased the budgetary allocation for the sector by Rs 1 lakh Cr. to Rs 5.97 lakh Cr.
Starting with an allocation of around Rs1.81 trillion in 2014-15, expenditure towards infrastructure reached Rs4.94 trillion in 2017-18.
L&T continues to be the best play in the Indian infrastructure space, given its strong business model (diversified with a presence across all segments of infrastructure i.e. power, roads, hydrocarbons & process industries), diverse skill sets, strong execution capabilities and relatively healthy balance sheet.
The Company is also focusing to scale up its operations in niche areas like defence, nuclear power & shipbuilding that have the potential to add significantly to overall revenues in the next three to five years.