Order inflow surprise, challenges on profitability continues! January 29, 2016 Kunal Sheth kunalsheth@plindia.com +91 22 66322257 Samir Bendre samirbendre@plindia.com +91 22 66322256 Rating BUY Price Rs1,102 Target Price Rs1,407 Implied Upside 27.7% Sensex 24,871 Nifty 7,564 (Prices as on January 29, 2016) Trading data Market Cap. (Rs bn) 1,024.0 Shares o/s (m) 929.6 3M Avg. Daily value (Rs m) 3207.4 Major shareholders Promoters 0.00% Foreign 18.18% Domestic Inst. 37.10% Public & Other 44.72% Stock Performance (%) 1M 6M 12M Absolute (14.6) (38.5) (36.1) Relative (9.9) (28.7) (19.9) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 62.5 62.0 0.7 2018 80.9 76.7 5.4 Price Performance (RIC: LART.BO, BB: LT IN) L&T reported consolidated PAT of Rs10.4bn for Q3FY16 in line with our estimates, led by lower interest cost and higher other income. However, the operating performance was weak as challenges continued to persist in E&C segment both on execution and profitability front. Increased order inflow for the quarter was a surprise (up 11% YoY to Rs385bn). L&T is expecting order flow to be flat YoY in FY16 against previous guidance of 5 7% growth. L&T maintained its sales guidance at 10 15% growth for FY16. It highlighted that domestic ordering continues to be dominated by public spending and Private sector capex is yet to pick up. Middle East continues to witness tendering activity for basic infrastructure even in the face of oil price drop. Working capital remained stable at 23.6% of sales in Q3FY16 (V/s 24% sales in Q2FY16). We have cut our earnings estimate by ~10% for FY16& FY17 to factor in weak margin and revised out TP downward to Rs 1407 (Previous Rs1721). We Maintain BUY, given the potential the company has once the turnaround sets in. Weak profitability in E&C segment: L&T reported consolidated sales of Rs258bn, up 8% YoY (PLe: Rs262bn). Domestic sales were down 6% YoY and International sales were up 39% YoY. L&T highlighted that domestic execution environment continues to be challenging across sectors like Building & Factory/Transport/water etc. While E&C business grew by 10% YoY Services businesses were up (IT&Ts and Financial services) up ~ 16% YoY. EBITDA for the quarter was down 8% YoY to Rs26.4bn and EBITDA margin stood at 10.3% (PLe: 12.1%) down 190bps YoY. Under utilization in MMH and Heavy Engineering segment and job mix issues (project not reaching profit booking stage) in Infrastructure segment and increased provision impacted margins in E&C segment. Reduced Interest cost ( down 19% YoY due to debt repayment and refinancing) and higher other income ( up 92% YoY due to treasury gain). Led to Adj. PAT growth of 20% YoY at Rs10.4bn (PLe: Rs 10.4bn). Contd...2 Key financials (Y/e March) 2015 2016E 2017E 2018E Revenues (Rs m) 920,046 1,012,050 1,163,858 1,396,630 Growth (%) 8.1 10.0 15.0 20.0 EBITDA (Rs m) 113,356 117,140 141,556 175,106 PAT (Rs m) 44,077 42,741 58,051 75,171 EPS (Rs) 47.4 46.0 62.5 80.9 Growth (%) 1.9 (3.0) 35.8 29.5 Net DPS (Rs) 13.6 11.3 13.2 18.4 Q3FY16 Result Update (Rs) 2,000 1,500 1,000 500 0 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Profitability & Valuation 2015 2016E 2017E 2018E EBITDA margin (%) 12.3 11.6 12.2 12.5 RoE (%) 13.3 10.1 10.9 14.8 RoCE (%) 5.0 4.6 5.4 6.1 EV / sales (x) 2.1 1.9 1.7 1.5 EV / EBITDA (x) 17.0 16.6 14.2 12.0 PE (x) 23.2 24.0 17.6 13.6 P / BV (x) 2.5 2.3 2.1 1.9 Net dividend yield (%) 1.2 1.0 1.2 1.7 Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Order inflow surprised positively: L&T maintained their guidance for sales growth of 10 15%, while trimmed order inflow guidance for FY16. L&T is expecting order flow to be flat YoY in FY16 against previous guidance of 5 7% growth implying Q4 inflow of Rs 600bn (up 27% YoY). Order flow for the quarter surprised positively (up 11% YoY) to Rs384bn and order book stood at Rs2.56tn up 14% YoY. Q3FY16 Order Inflow growth led by Transportation Infra (Roads/Railways), Power T&D, and Water Businesses. Domestic ordering dominated by public spending and Private sector capex yet to pick up. Middle East continues to witness tendering activity for basic infrastructure even in the face of oil price drop. The current prospect pipeline is Rs2trn (v/s Rs3.7trn at the start of Q2FY16 and Rs5trn at the start of FY16). Out of prospect pipeline of Rs2trn, (Rs900bn Infrastructure/Rs550bn Power BTG and T&D/Rs80bn MMH/Rs180bn Hydrocarbon/ Rs 350bn others including defence). Standalone numbers remain weak execution challenges persist: Standalone sales were down 1.5% YoY to Rs147bn. EBITDA was down 36% YoY to Rs10.1bn, EBITDA margin dipped 350bps YoY to 6.5%. Margin was impacted by weak execution, under utilization in various segments, cost provision and job mix issue in Infrastructure segment. Adjusted PAT was down 25% YoY to Rs8bn. The company highlighted that the execution scenario in domestic market continues to challenging. Other con call highlights: 1) working capital remained steady at 24% sales at end of Q3FY16 (Vs 24% end of Q2FY16) 2) Sold Mall in Chandigarh in Q3FY16 (booked in others segment) 3) other income includes gain from sale of investment (Astra micro wave shares) 4) Revenue growth in infrastructure segment affected by delayed execution in areas where slow payments and delayed clearances are seen 5) Legacy project nearing completion in the hydro carbon segment. Outlook and Valuation: The stock is trading at 18xFY17E earnings. We have cut our estimate by ~10% for FY16& FY17 to factor in weak margins. We have revised our PER multiple downwards to 21X from 22X to reflect the weak outlook in Middle East and challenges in profitability. We have also revised the TP downward to Rs 1407 (Previous Rs1721). L&T continues to be the best play in the Indian infrastructure space, given its strong business model, diverse skill sets, strong execution capabilities and relatively healthy/large balance sheet. We expect company to deliver 25% earning CAGR over FY15 18E. Maintain BUY. January 29, 2016 2
Exhibit 1: SOTP Fair Value (Rs) Basis L&T Core business 962 21x FY17E EPS Ex dividends L&T Hydrocarbon business 7 10x FY17E EPS L&T IDPL 139 1.5x P/B and 1x for Hyderabad metro L&T InfoTech 186 12x FY17E EPS L&T Finance Holding 59 68% stake; 20% Hold co discount on current market cap L&T's equity investment in BTG 4 1.5x equity investment Other businesses 50 1.5x book value. Target price 1,407 Source: PL Research Exhibit 2: Q3FY16 Result Overview Consolidated (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Sales 258,293 238,479 8.3 233,932 694,747 639,819 8.6 RM cost 191,881 175,251 9.5 154,206 501,559 463,235 8.3 Personnel cost 24,110 19,253 25.2 24,328 69,278 59,038 17.3 Other expense 17,190 12,363 39.0 13,724 44,720 38,659 15.7 EBITDA 26,499 28,900 (8.3) 25,917 75,318 77,393 (2.7) EBITDA margin (%) 10.3 12.1 11.1 10.8 12.1 (10.4) Other income 4,517 2,347 92.4 2,191 9,281 7,263 27.8 PBIDT 31,016 31,247 (0.7) 28,108 84,599 84,656 (0.1) Depreciation 6,198 6,791 (8.7) 6,936 19,356 20,350 (4.9) Interest 7,446 9,204 (19.1) 8,278 22,791 23,895 (4.6) PBT 17,372 15,252 13.9 12,894 42,452 40,412 5.0 Tax 5,555 5,693 (2.4) 4,936 15,889 18,390 (13.6) Adjusted PAT 10,348 8,649 19.7 6,863 23,273 24,426 (4.7) Extra ordinary income/ (exp.) 0 0 3,096 0 0 Reported PAT 10,348 8,649 19.7 9,959 26,369 26,386 (0.1) January 29, 2016 3
Exhibit 3: Segmental snapshot Consolidated (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Infrastructure 121,124 117,967 2.7 111,446 317,320 291,588 8.8 Power 22,957 11,419 101.0 14,064 48,257 33,077 45.9 Metallurgical and Material Handling 6,942 7,310 (5.0) 6,671 19,131 24,736 (22.7) Heavy Engineering 9,487 8,293 14.4 6,482 22,511 25,516 (11.8) Electrical & Electronics 13,752 13,595 1.2 13,368 38,471 37,144 3.6 Hydrocarban 21,839 17,919 21.9 19,612 63,523 51,811 22.6 IT & Technology Services 23,199 19,889 16.6 23,172 67,536 56,168 20.2 Financial Services 18,979 16,363 16.0 18,636 55,448 47,245 17.4 Developmental Projects 12,880 11,459 12.4 13,544 38,466 42,818 (10.2) Others 17,093 21,323 (19.8) 17,659 51,066 50,218 1.7 Total 268,250 245,537 9.3 244,653 721,728 660,319 9.3 Less: Intersegment 7,669 5,211 47.2 8,602 20,493 15,450 32.6 Net Segment Revenue 260,581 240,325 8.4 236,051 701,236 644,869 8.7 Exhibit 4: Q2FY16 Result Overview Standalone (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 9MFY16 9MFY15 YoY gr. (%) Net Sales 147,739 149,950 (1.5) 132,343 387,183 380,495 1.8 RM cost 118,191 119,209 (0.9) 103,717 304,039 295,886 2.8 Personnel cost 11,997 9,588 25.1 12,545 34,447 31,337 9.9 Other expense 7,532 5,459 38.0 5,957 18,808 13,291 41.5 EBITDA 10,019 15,695 (36.2) 10,124 29,889 39,980 (25.2) EBITDA margin (%) 6.8 10.5 (35.2) 7.6 7.7 10.5 (26.5) Other income 6,171 6,219 (0.8) 4,875 16,580 17,132 (3.2) PBIDT 16,190 21,914 (26.1) 14,999 46,469 57,112 (18.6) Depreciation 2,444 2,638 (7.4) 2,536 7,444 7,623 (2.4) Interest 3,812 5,004 (23.8) 3,834 10,518 10,849 (3.1) PBT 9,934 14,271 (30.4) 8,628 28,508 38,639 (26.2) Tax 2,022 3,613 (44.0) 2,203 7,188 10,256 (29.9) Adjusted PAT 7,912 10,598 (25.3) 6,426 21,347 28,241 (24.4) Extra ordinary income/ (exp.) 917 NA 5,459 6,376 1,714 272.0 Reported PAT 8,829 10,598 (16.7) 11,884 27,723 29,955 (7.4) Exhibit 5: Segmental Revenue Breakup (Rs m) Y/e March Q3FY16 Q3FY15 YoY gr. (%) Infrastructure 97,846 107,201 (8.7) Power 21,075 10,747 96.1 Metallurgical and Material Handling 6,780 6,961 (2.6) Heavy engineering 8,256 7,486 10.3 Electrical & Electronics 10,853 10,596 2.4 Others 7,909 10,305 (23.3) January 29, 2016 4
Exhibit 6: Consolidates Segment Snapshot Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Infrastructure Sales 71.1 95.9 115.2 150.7 82.8 106.4 117.2 YoY gr. 17.4% 26.9% 22.3% 12.3% 16.4% 10.9% 1.7% EBITDA Margin 10.3 10.1 9.0 13.6 10.7 8.6 8.6 Power Sales 9.8 11.6 11.3 14.4 11.1 14.0 22.8 YoY gr. 34.2% 19.4% 30.2% 7.7% 13.3% 20.7% 101.8% EBITDA Margin 20.0 12.9 19.7 13.6 9.8 16.1 10.5 Metallurgical & Material Handling (MMH) Segment Sales 9.2 7.7 6.8 7.8 4.8 5.6 5.8 YoY gr. 12.9% 31.9% 56.1% 55.4% 47.6% 27.3% 14.7% EBITDA Margin 12.5 9.2 9.3 10.8 0.3 5.5 0.3 Heavy Engineering segment Sales 8.2 8.0 8.0 9.8 6.2 6.2 8.6 YoY gr. 4.2% 20.8% 25.2% 31.5% 24.5% 22.5% 7.5% EBITDA Margin 12.7 12.7 10.4 12.9 6.3 15.9 1.6 Electrical & Automation (E&A) Segment Sales 9.6 11.5 12.1 14.8 9.8 11.2 12.1 YoY gr. 10.2% 2.7% 3.4% 6.5% 2.2% 2.6% 0.8% EBITDA Margin 8.9 13.7 16.0 18.5 10.5 12.9 12.4 IT & Technology Services Segment Sales 17.4 18.5 19.7 20.2 21.0 22.9 22.7 YoY gr. 22.1% 14.2% 21.6% 18.8% 20.8% 23.8% 15.2% EBITDA Margin 20.2 18.6 20.5 22.0 21.2 21.1 22.8 Hydrocarbon Sales 15.5 18.0 17.7 22.0 21.9 19.3 21.7 YoY gr. 48.9% 24.2% 25.9% 0.9% 41.0% 7.2% 22.6% EBITDA Margin 57.4 0.1 4.8 6.8 4.2 2.9 4.2 Other Sales 12.5 14.4 19.8 15.1 14.9 16.3 15.6 YoY gr. 28.0% 6.7% 63.6% 5.0% 19.0% 13.2% 21.2% EBITDA Margin 20.6 18.9 27.7 22.2 21.2 18.9 26.1 January 29, 2016 5
Exhibit 7: Consolidated Order inflow 1100 1050 (Rs bn) 1000 950 900 Exhibit 8: Consolidated Order book 2600 2500 (Rs bn) 2400 2300 2200 850 9MFY15 9MFY16 2100 9MFY15 9MFY16 Exhibit 9: Order inflow break up for Q3FY16 (%) International 32% Domestic 68% Exhibit 10: Group Cash Flow (Rs bn) Q3FY16 Q3FY15 Operating profit 29.2 30.1 Adjustment for NWC (3.1) (3.4) Direct Taxes (8.9) (7.2) Net Cash from operations 17.2 19.4 Investment in fixed assets (11.8) (17.7) Investments/Loans to S&A Cos. (Net) (0.0) (0.7) Purchase /Sales of long term & current investments and divestments (Net) 13.7 (5.7) Interest and Div. received from investments (0.8) 0.4 Net Cash from/ (used in) investing activities 1.1 (23.8) Proceeds from issue of share capital 14.1 9.7 Borrowings (Net) 28.8 31.2 Loans towards financing activities (44.3) (25.3) Dividends and interest paid (11.3) (9.8) Net cash from financing activities (12.8) 5.8 Net (Dec)/Inc. in cash and cash equivalents 5.5 1.5 January 29, 2016 6
Income Statement (Rs m) Y/e March 2015 2016E 2017E 2018E Net Revenue 920,046 1,012,050 1,163,858 1,396,630 Raw Material Expenses 672,937 735,498 838,978 1,010,700 Gross Profit 247,109 276,552 324,880 385,929 Employee Cost 79,222 95,066 109,326 125,725 Other Expenses 54,531 64,346 73,998 85,098 EBITDA 113,356 117,140 141,556 175,106 Depr. & Amortization 26,225 26,487 28,606 30,895 Net Interest 28,507 30,503 33,553 36,908 Other Income 13,549 12,243 13,348 12,294 Profit before Tax 72,172 72,392 92,745 119,598 Total Tax 22,836 24,613 32,460 41,859 Profit after Tax 49,337 47,779 60,284 77,739 Ex Od items / Min. Int. 5,303 (1,105) 2,290 2,633 Adj. PAT 44,077 42,741 58,051 75,171 Avg. Shares O/S (m) 929.6 929.6 929.6 929.6 EPS (Rs.) 47.4 46.0 62.5 80.9 Cash Flow Abstract (Rs m) Y/e March 2015 2016E 2017E 2018E C/F from Operations 74,469 62,432 39,196 26,522 C/F from Investing (62,667) (23,279) (22,635) (21,929) C/F from Financing 4,894 25,711 (5,504) (15,132) Inc. / Dec. in Cash 16,696 64,864 11,057 (10,538) Opening Cash 40,866 57,562 122,426 133,482 Closing Cash 57,562 122,426 133,482 122,944 FCFF (16,747) (6,679) (23,363) (39,405) FCFE 75,964 75,288 58,898 43,195 Key Financial Metrics Y/e March 2015 2016E 2017E 2018E Growth Revenue (%) 8.1 10.0 15.0 20.0 EBITDA (%) 5.4 3.3 20.8 23.7 PAT (%) 2.2 (3.0) 35.8 29.5 EPS (%) 1.9 (3.0) 35.8 29.5 Profitability EBITDA Margin (%) 12.3 11.6 12.2 12.5 PAT Margin (%) 4.8 4.2 5.0 5.4 RoCE (%) 5.0 4.6 5.4 6.1 RoE (%) 13.3 10.1 10.9 14.8 Balance Sheet Net Debt : Equity 2.2 2.1 2.1 2.0 Net Wrkng Cap. (days) 20 26 20 11 Valuation PER (x) 23.2 24.0 17.6 13.6 P / B (x) 2.5 2.3 2.1 1.9 EV / EBITDA (x) 17.0 16.6 14.2 12.0 EV / Sales (x) 2.1 1.9 1.7 1.5 Earnings Quality Eff. Tax Rate 31.6 34.0 35.0 35.0 Other Inc / PBT 14.7 16.9 14.4 10.3 Eff. Depr. Rate (%) 6.0 5.6 5.7 5.8 FCFE / PAT 172.3 176.1 101.5 57.5. Balance Sheet Abstract (Rs m) Y/e March 2015 2016E 2017E 2018E Shareholder's Funds 409,091 442,919 479,871 534,645 Total Debt 955,700 1,037,667 1,119,928 1,202,529 Other Liabilities 5,396 5,396 5,396 5,396 Total Liabilities 1,370,186 1,485,981 1,605,195 1,742,569 Net Fixed Assets 480,468 516,971 546,971 576,971 Goodwill 22,150 22,150 22,150 22,150 Investments 96,121 96,121 96,121 96,121 Net Current Assets 764,205 868,473 959,551 1,064,483 Cash & Equivalents 57,562 122,426 133,482 122,944 Other Current Assets 1,278,298 1,314,279 1,479,534 1,725,698 Current Liabilities 571,655 568,232 653,466 784,160 Other Assets 7,242 7,242 7,242 7,242 Total Assets 1,370,186 1,485,981 1,605,195 1,742,569 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Net Revenue 280,226 202,522 233,932 258,293 EBITDA 36,090 22,902 25,917 26,499 % of revenue 12.9 11.3 11.1 10.3 Depr. & Amortization 5,876 6,222 6,936 6,198 Net Interest 4,739 7,067 8,278 7,446 Other Income 2,808 2,574 2,191 4,517 Profit before Tax 28,283 12,186 12,894 17,372 Total Tax 7,961 5,458 4,936 5,555 Profit after Tax 20,696 6,062 9,959 10,348 Adj. PAT 19,712 6,062 6,863 10,348. January 29, 2016 7
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