L&T: At the Business Crossroads

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  • Date: 22-Jan-13               
  • CMP: 1033 (adjusted for July 2013 bonus)
  • Large Cap – Mkt Cap 96,000 crores
  • Advice: Invest for the long term

JainMatrix Investments presents investors the complete report on Larsen & Toubro Ltd as part of the Investor Rewards Fortnight. 

Summary

L&T is a buy at these levels. The key positives are:

  • Diversified across a business verticals like Construction, Roads, Oil & Gas, Power, Fertilizer, Ship Building, Water, Railways, IT and Finance, & a big international presence.
  • Management has a reputation for excellence and professionalism.
  • Good growth with Revenues, EBITDA and PAT gaining 22%, 31% and 20% CAGR over 5 years.
  • Valuation is below historical averages. The share is 32% below highs from 5 years ago.

The negatives are

  • Expected share performance is dependent on domestic economic and investment recovery.
  • Early signs of stress in the balance sheet due to high debt and cash flow challenges. 

L&T, JainMatrix Investments

Business Snapshot:

  • L&T is a professionally run Indian conglomerate with focus on Engineering & Construction.
  • The consolidated turnover is Rs. 65,000 crores and Profits 4,700 cr (FY12). Institutions like Mutual Funds, Banks, FIIs and Insurance companies hold 53% stake, with no promoter in sight.
  • The business areas are Engineering & Construction Projects, Infrastructure, Manufacturing, IT and Financial Services. The leader is AM Naik who is the Exec. Chairman. It has about 45,000 employees.
  • International business may be contributing over 25% of revenues.

The main revenue segments are:

L&T Segment Revenues FY11, FY12, JainMatrix Investments

Fig 1 – L&T Segment Revenues, JainMatrix Investments 

Pricing Snapshot

The 10-year view of the share price of L&T shows us:

  • The share reached its all time high of 2163 in Nov’07, and even today 5 years later is 32% below this. It also fell to a low of 379 in Mar’09, before recovering. See Fig 2.
  • The share price has appreciated 42% CAGR over 10 years, making it a top wealth generator.
  • The share is a volatile large cap, and Reuters estimates the Beta as 1.48.
Price History, Jainmatrix Investments

Fig 2 – Price History, Jainmatrix Investments 

Financial Snapshot 

L&T Financials, JainMatrix Investments

Fig 3 – L&T Financials, JainMatrix Investments  

  • The Consolidated Revenues, EBITDA and PAT have gained by 22%, 31% and 20% CAGR over 5 years.
  • EBITDA margin is near the peak of 20%, but PAT margin at 7.2% is below the 12.2% peak.
  • P/E has thus moved in a wide range of 15-30 times, and today is at 22 times. Fig 4. At this level, L&T looks cheap and just below historical average PE level of 22.5 times.
  • Dividend has continually increased, and today’s 825% at FV Rs 2 gives a dividend yield of 1.1%.
Price and PE chart, JainMatrix Investments

Fig 4 – Price and PE chart, JainMatrix Investments 

  • Consolidated Total Debt and Cash Flow data are analyzed in Fig 5.
Price and EPS chart, JainMatrix Investments

Fig 5 – Price and EPS chart, JainMatrix Investments 

  • The total debt of L&T has grown faster than Revenues in the last 5 years. While there are a number of new projects, and revenues have grown, but these are soaking up cash, due to Public-Private type projects, or longer payment cycles, or higher working capital requirements.
  • While Free Cash Flow is negative in FY12, when seen in proportion to Revenues, it is not too high. The DE ratio is at 1.74, below the danger level of 2.0 for such companies.
  • The standalone firm has an order book of 1,45,723 cr. in FY12, so L&T has a Booked to Billing ratio of 2.7 times. This is a healthy ratio among EPC firms.

Opportunities and Concerns

Opportunities

  • L&T has a very wide portfolio extending from Building Construction, Roads, Oil and Gas, Power, Infrastructure, Switchgear, Defense, Fertilizer, Ship Building, Water and Railways. In addition it has operations in India and abroad. In India, the growth areas have been Metro construction in cities, the new dedicated Freight corridor, Oil and Gas projects, Roads, Power Gen. and transmission, etc.
  • L&T is able to react to growth opportunities and sectors and focus on these. The FY13 focus has been on international business, which has grown better than domestic. This is in the form of new regional teams. There have also been a number of new technical partnerships.
  • L&T enjoys an excellent reputation as a professional and technically strong team.
  • L&T has also worked on internal improvements like streamlining the structure, Vertical focus, spin-off of noncore businesses and investment into growth areas. These are bearing fruit.
  • L&T sees value in listing arms and selling JV stakes, as part of its strategic plan, called Lakshya. L&T Finance was listed in 2011, and is today a fast growing diversified NBFC with a 15,000 crore mkt cap that is 83% owned by L&T. Another listing prospect is L&T Infotech.

Concerns

  • L&T with its EPC capabilities is a play on the Industrial growth and capacity expansion in India. But the GDP growth has been falling to lows of 6.5% (FY12) and 5.5% (FY13). In terms of infrastructure, there have been problems like high interest rates, govt. clearances, SEB solvency, etc. However, the government is focused on easing the process of infra creation by removing bottlenecks. In terms of GDP, it is expected that the worst is behind us, and there should be a rebound in the future.
  • Interest rates in India are among the highest in the world. While the govt. fights inflation, the rates have affected growth and new projects. But expectations are the rates will reduce in a few quarters.
  • Competition for L&T across businesses is intense, from domestic, MNC firms and Chinese suppliers.  

Opinion, Outlook and Recommendation

  • The Indian economy is today on a recovery path. There is an urgency in the government reforms, a thrust on infrastructure and an attempt to boost Investments, foreign and Indian. Growth imperatives will push down interest rates, and the capex Investment cycle may sputter back to life.
  • Globally, the Middle East retains its attractiveness, the only worry being social and war tensions.
  • Management quality, integrity and stability are big positives. Strategic, structural and financial directions from management have helped L&T ride through the bad phases in the Indian economy. A turn for the positive in the economy will see the L&T share making big gains.
  • L&T stock is a buy today based on a conviction that the firm has the scale, the diversity and the vertical and geographical width to respond fast to growth opportunities.
  • Advice: Invest for the long term.

JainMatrix Knowledge Base

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Disclaimer and Disclosure:

It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it. Punit Jain has owned (long only) L&T since Dec 2007. This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent Financial Expert/Advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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One thought on “L&T: At the Business Crossroads

  1. JainMatrix says:

    Reblogged this on JainMatrix Investments and commented:

    Dear Investors,
    Continuing with the theme of Investor Rewards Fortnight, JainMatrix Investments is proud to present its fifth reward Report, L&T: At the Business Crossroads. The entire report is published here, for the first time in public, for your benefit.
    Readers may note that the share has appreciated by 65% since my Buy call 17 months ago. Another good pick from JainMatrix Investments.
    Happy Investing,
    Punit Jain

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