Larsen & Toubro - Business...

Look beyond near-term order weakness

Larsen & Toubro

Update | 21 October 2015Sector: Capital Goods

Amit Shah ([email protected]); +91 22 3029 5126

Ankur v Sharma ([email protected]); +91 22 3982 5449

Contents: Look beyond near-term weakness in orders Summary ............................................................................................................. 3

Lack of large order wins in 1H puts FY16 inflow guidance at risk ............................ 4

The Monitorable Troika ...................................................................................... 12

Correcting the capital structure a priority ............................................................ 18

Well positioned to benefit from economic recovery ............................................ 33

Operating Matrix ................................................................................................ 34

Financials and valuations .................................................................................... 36

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Larsen & Toubro

21 October 2015 3

BSE Sensex S&P CNX 27,307 8,262

Stock Info Bloomberg LT IN

Equity Shares (m) 935.5

52-Week Range (INR) 1,893/1,413 1, 6, 12 Rel. Per (%) -3/-9/0 M.Cap. (INR b) 1,450.1

M.Cap. (USD b) 22.2

12M Avg Val (INR M) 3,319

Free float (%) 100.0

Financial Snapshot (INR b) Y/E Mar 2015 2016E 2017E

Sales 928 1,055 1,226

EBITDA 113 126 161

Adj PAT* 44 48 61

EPS (INR)* 47 51 65

EPS Gr. (%) -4.2 8.2 27.3

BV/Sh (INR) 437.3 473.2 519.7

RoE (%) 11.2 11.2 13.1

RoCE (%) 6.5 6.3 7.3

P/E (x)* 32.8 30.3 23.8

P/BV (x) 3.8 3.5 3.3 *Consolidated

Shareholding pattern %

Jun-15 Mar-15 Jun-14

Promoter 0.0 0.0 0.0

DII 36.7 36.1 36.6

FII 21.4 19.1 21.9

Others 41.9 44.8 41.5 Notes: FII includes depository receipts

Stock Performance (1-year)

1,200

1,400

1,600

1,800

2,000

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Larsen & Toubro Sensex - Rebased

21 October 2015

Update | Sector: Capital Goods

Larsen & Toubro CMP: INR1,550 TP: INR2,000 (+29%) Buy

Look beyond near-term weakness in orders Focus shifts to execution, working capital and profitability Lack of large order wins in 1HFY16 puts FY16 guidance of 15% growth in order

flow at risk. We model 9% order growth versus 13% earlier, which still implies an order book growth of 27%.

The Monitorable Troika: The street’s focus is now on execution, working capital and hydrocarbon margins. Our sensitivity analysis of the impact of lower oil prices shows that if there is a two-year delay in key overseas projects, sales and EPS would be impacted by 2-3%.

Correcting the capital structure a priority; monetization of assets a step in the right direction.

F16 order inflows guidance at risk; we model 9% growth v/s management guidance of 15% In 2QFY16, we expect consolidated intake of INR300b (v/s INR264b in 1QFY16 and INR398b in 2QFY15). The management has guided consolidated intake growth of 15% in FY16 (calculated at INR1.8t v/s INR1.55t in FY15), which implies an asking rate of INR1.2t (+49% YoY) in 2HFY16. This appears challenging, given the slow pace of order finalization. We build in 9% inflow growth at INR1.69t for FY16, which would still imply a 2HFY16 growth of 37% YoY and result in an order book growth of 27%. The Monitorable Troika: Street to focus on execution, working capital and hydrocarbon margins In our view, the street’s focus is now on (1) execution, (2) working capital, and (3) margins in the hydrocarbon business. We expect execution in the domestic segment to pick up in 2HFY16 and model 16% growth in consolidated E&C sales on pick-up in large domestic projects in 2HFY16. Pressure on working capital is could continue, but is likely to have peaked out at 25% of sales. Margins in the hydrocarbon segment are likely to remain negative in FY16 on closure costs for a few more projects. Correcting the capital structure a priority; monetization of assets a step in the right direction Standalone RoE has declined to 13% in FY15 from 28% in FY08 on investments in manufacturing, services and developmental projects. Our deep dive into the BTG, Forgings and Shipbuilding subsidiaries highlights continued underutilization. The road portfolio too is expected to contribute negatively while the Hyderabad Metro needs close monitoring – we expect INR10b-11b losses over the next few years. The management is looking to divest stakes across non-core assets to improve RoE, as quite a few of these businesses have built up size/scale and are ready to be monetized.

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21 October 2015 4

Lack of large order wins in 1H puts FY16 inflow guidance at risk We now model in 9% growth v/s guidance of 15%

For 2QFY16, LT announced order intake of INR114b, with very few large project (>INR15b) announcements during the quarter. This is meaningfully lower than INR249b of orders announced in 2QFY15 and highlights the risk to full-year order guidance, given a weak 1QFY16, when orders were down 21% YoY. We highlight that in 1HFY15, large projects were won, including the INR30b Statue of Unity, INR70b order for MP Genco Malwa (1,320MW; EPC), INR19b order for NTPC Tanda Boiler (1,320MW), INR24b order from BSNL, and overseas market orders of INR50b from Kuwait Oil Company and INR15b from KAHRAAMA for substations. This implies that 1HFY16 comes off a high base of last year. While LT is L1 in the two civil packages for Mumbai Metro Phase-3 (INR58b-60b), we expect these orders to be booked only in 3Q-4QFY16 and have not included them in our 2QFY16 estimates. Also, the order for the self-propelled towed gun (INR48b) is likely to be placed only by 4QFY16 and we build this in our order estimates for 4QFY16. Momentum in domestic large project wins fails to sustain in 1HFY16; base orders have remained stable Of the total of INR114b announced in 2QFY16, domestic orders were INR62b;

overseas orders accounted for the balance INR52b. Domestic orders are down 72% YoY (2QFY15: INR220b) while overseas orders are up 114% YoY (2QFY15: INR24.3b). In our recent interaction, the management highlighted that the pace of order awards has been slower than was anticipated at the start of the year.

During 1HFY15, LT had won quite a few large domestic projects. These project wins were after a gap of almost a year, as FY14 had just one large project win (Western DFC: INR67b) in the domestic market. Over the past year, the management has been focusing primarily on the domestic market for order growth and this is reflected in the 50% growth seen in the E&C orders in FY15. Conversely, with the fall in oil prices, there has been a slowdown in order intake in the overseas markets.

Exhibit 1: Consolidated E&C: Domestic order wins witness an upswing in FY15 after being flat over FY10-14

Source: MOSL, Company

Exhibit 2: Consolidated E&C: Overseas orders head lower on fall in oil prices


669

537

670 627

943

10

(20)

25

(6)

50

FY11 FY12 FY13 FY14 FY15

Domestic Orders YoY growth

67

152 145 393

284

131 127

(5)

171

(28)


Overseas YoY growth

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21 October 2015 5

For LT, the base order intake in domestic E&C (excluding large project wins of INR15b+) averaged at ~INR135b/quarter over the last 10-12 quarters and has remained in a range. The volatility in reported intake is largely a function of the large project wins, and thus, pick-up in intake would also be led by large projects in segments like Transport Infrastructure (Metros, Railways, Roads, Ports), Process Industries (Metals, Material Handling), Power (Thermal, Hydro), Hydrocarbons, Defense, etc. The sharp fall in large project orders from over INR100b in FY15 to INR15b-30b in 1QFY16 and 2QFY16 is noteworthy.

Exhibit 3: Consolidated E&C (including unannounced orders): Large domestic order wins / overseas projects impacted (INR b)

Source: MOSL, Company, **2Q16 is our estimate

Exhibit 4: Domestic E&C: Momentum in large project wins during FY15 has failed to sustain; base orders stable (INR b)

Source: MOSL, Company, **2Q16 is our estimate

For 2QFY16, we estimate LT’s order intake at ~INR300b and its E&C orders at INR217b. This takes into account INR114b of announced E&C orders and INR96b of unannounced orders. With our estimate of 2QFY16 orders at INR300b (down 25% YoY), 1HFY16 orders are seen down 23% YoY at INR560b.

Exhibit 5: E&C consolidated intake (INR b): We have assumed unannounced orders at INR96b (4-quarter average)


Exhibit 6: E&C consolidated intake run rate required in 2H to achieve guidance is highly demanding (INR b)


Assuming order wins of INR560b in 1HFY16 (INR263b in 1Q and INR300b in 2Q),

LT would need INR1.22t (+49% YoY) in 2H to meet its order flow guidance. This appears highly unlikely in our view and we see a serious risk of LT missing its full-year order inflow guidance of +15%. Our FY16 core E&C order inflow estimate is INR1.34t and we expect orders worth INR400b to be booked in 1HFY16.

187

8

3 2

69

121

9

6

138

1

69

167

1

46

140

2

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201

1

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0

47

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2

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3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

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3QFY

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4QFY

13

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14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

Domestic Overseas

129

69

196

92

61 95

13

3 99

146

120 15

7 13

4 13

9 12

8 15

4 96

153

118 16

5 10

8 23

3 58

15

73

29

35 43

36

68 0

20

57

67

0 0 0

24

130

116

141

27

15

2QFY

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3QFY

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12

1QFY

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13

3QFY

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4QFY

13

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14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

Base Orders Large Projects (INR15b+)

104

196

181

121

110

145

151

186

103

182

174

239

147

174

223

249

136

279

120

121

13

40 13

25

44

49

27 6

75

67

57 39

74

98 24

73

137

107

61

96

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

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1QFY

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2QFY

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1QFY

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4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

Order Announced Un Announced Orders

170

165 22

1 13

8 189

118

285

144

146

154 19

4 17

8 19

1 17

8 249

232 27

8 22

1 271

246 32

3 27

2 38

6 18

1 217

2QFY

10

3QFY

10

4QFY

10

1QFY

11

2QFY

11

3QFY

11

4QFY

11

1QFY

12

2QFY

12

3QFY

12

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

Average intake INR170B

INR250B INR330B

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21 October 2015 6

Exhibit 7: 2H run rate to achieve FY16 consolidated intake is demanding (INR b)

FY15 1QFY16 2QFY16 3QFY16E 4QFY16E FY16E

E&C 1,227 181 217 415 501 1,315 Electrical 62 11 17 15 28 70 Services 186 50 48 57 61 216 Others 78 21 18 23 23 86 Consolidated Intake 1,554 264 300 510 613 1,686


Exhibit 8: Key projects bagged by L&T in 2QFY16

Key projects bagged in 2QFY16 INR M

T&D Orders from Oman Malaysia, Oman, Tamil Nadu transmission company 15,630

T&D order from Quatar general Electricity and Water Corporation "Kahramaa" 8,640 Water and Effluent treatment system in 3 packages from Public health engineering department under Rajasthan Rural Water supply and Fluorosis mitigation project 14,890

Construction of ballastless tracks for Riyadh Metro Lines-1&2 on a design and build basis 10,700

EPC sub- contract for setting up 400MW gas based power plant project (contractor- Marubeni Corporation of Japan) in Bbiyana, Bangladesh power development board (BPDB) 17,000

Construction of a commercial complex in Gurgaon 7,400

Rural Water supply and sanitation order Telangana 5,730

Turnkey order from Transmission corporation of Telangana Limited 1,920

Supply installation testing and commissioning of ballast less track of standard usage 3,050 Water supply order from Telangana drinking water supply project and waste water turnkey order from Rajasthan Urban infrstructure development project 15,090

EPC of 115MW solar power plant in south India 13,760


Order losses in key sectors leading to concerns on meeting FY16 guidance In our recent interactions with the management, we were given to understand that LT had a bid pipeline of INR5.1t at the start of 1QFY16. The largest sectors in this pipeline are Infrastructure (primarily Transport, B&F and Civil Infrastructure), Power Generation, T&D and Hydrocarbons. LT needed to win large, chunky orders to be able to meet its FY16 guidance. However, the slow pace of order awards combined with loss in market share in some key end sectors have put the guidance at risk. Exhibit 9: Bid pipeline for L&T as at the start of 1QFY16 (INR b) Order prospects as at the start of 1QFY16 INR b

Infra (including transportation, civil infrastructure and B&F) 2,400

Power Generation 750

T&D 600

MMH 250

Hydrocarbon 450

Heavy Engineering 350

Others 300

Total 5,100


We highlight our observations on some of the key sectors that LT was targeting for order wins during the year and the outlook over the next few years: Power Generation: We note that ~10GW of projects have been bid

out/awarded on nomination basis during the year, but LT has not qualified to

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21 October 2015 7

win any of these. The total value of such projects amounts to INR400b-450b. These orders were won at very competitive prices and LT may have intentionally stayed away from low margin orders. Another 5GW of orders are in the pipeline for 2H, but how many of these can be finalized during this year remains uncertain. Having booked INR151b of orders in FY15, we expect a sharp decline in the intake in this segment in F16. A few large orders bagged in FY15 such as the MP Genco Shri Singajee (1,320 MW) and NTPC Tanda (1,320 MW, Boiler) bunched up in FY15 after being delayed for up to a year due to lack of land and/or clearances. The only large order won till date is for the gas EPC power plant in Bangladesh for INR17b. We expect another 10-1212GW of orders could be finalized during FY17.

Exhibit 10: Power plants bid/given out on negotiation basis during FY16 Name of L1 bidder Name of Company Location Unit Size Capacity Value

BHEL NTPC Barethi 4*660 2,640 82,500

BHEL Mahagenco Bhusawal 1*660 660 29,000

BHEL Telengana Genco Nalgonda 5*800 4,000 180,000

BHEL/ Alstom Bharat Forge NTPC Kareemnagar 2*800 1,600 45,940

Doosan Heavy /BHEL NTPC Pudimadaka 5*800 4,000 101,000

Doosan - Toshiba/JSW Power Systems UPRVUNL Harduaganj 1*660 660 34,360

Source: MOSL, Industry

Hydrocarbon: LT has lost out on 3 of 4 wellhead platforms tendered out by

ONGC. It is still targeting prospects worth INR450b for the remaining three quarters. These are mostly in the downstream space (refining & petrochemicals) as upstream capex has dried up (both in domestic and overseas markets) post the sharp fall in oil prices in the past one year. A large INR50b order from Kuwait Oil Company in 1QFY15 had helped FY15 hydrocarbon orders touch INR107b. With LT not bidding for such large hydrocarbon jobs, it becomes all the more difficult to grow its orders in FY16 over the high base of last year. Over the medium term, we do expect domestic hydrocarbon capex to pickup as a result of the fall in crude prices which helps reduce the subsidy burden for the OMC’s and therefore lead to more brownfield and Greenfield capex by these companies on the refining and petrochemicals front.

Roads: LT has won two of the 10-11 EPC road projects it had bid for this year. A

total of 20 road projects have been bid this year on EPC mode. In the pipeline are another INR200b of road projects, which could be awarded by NHAI over the coming quarters alongside four BOOT and hybrid expressway projects, where LT could participate as the EPC contractor. NHAI intends to award 10,000km of road projects in FY16, of which 50% would be on EPC basis and the balance on hybrid/BOT basis. NHAI had already awarded projects of 3,500km till July 2015. Opportunities for road orders in the GCC countries remain robust despite a fall in oil prices, as social infrastructure spending is expected to continue.

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21 October 2015 8

Exhibit 11: NHAI road award target v/s actual achievement over FY07-16 (km)


Building and Factories: LT has been getting orders worth INR200b-250b

annually from this segment. This has helped make up for the fall in orders in the areas of roads, power, and metros during FY12-13. This segment has seen order inflows flattening out on slowdown in the end market of real estate and we do not expect any significant growth in this segment in FY16. Announced orders from this segment were at INR100b in 1HFY15 (INR206b for FY15), but orders worth only INR31b have been announced during 1HFY16. However, this included the large INR30b order for the Statue of Liberty in 2QFY15.

Heavy Engineering including Defense: We are optimistic on the prospects for

this segment and expect orders to double to INR100b during FY16. This would primarily be from the USD750m (INR48b) order for self-propelled howitzers that are likely to get placed by 4QFY16. According to the management, orders for the four landing platform docks (INR160b), of which two are to be placed with private yards and eight corvettes worth INR80b, are likely to be placed in 4QFY16/1QFY17. We expect orders for these to be placed only in FY17 and are not building in any of these orders in our estimates for FY16. Orders for the six submarines (INR500b), battle management system (INR400b) and tactical communication system (INR100b) are likely only in FY17/FY18.

817

2,885 3,597

7,000

9,000

7,300

9,500

5,000

8,300

10,000

1,740 1,234 643

3,360

5,167 6,491

1,100 1,460

3,500

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E

Award target Actual Award

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21 October 2015 9

Exhibit 12: Defense opportunities for LT in the next few years Description INR b No of units

Battle Management System 400

Tactical Communication system 100

Landing Platform Docks(LPD's)-Navy 160-200 4

6 Nuclear Submarines(Project 75I)-Air Independent Propulsion 600 6

Howitzer Towed Guns 100 400

155mm/52 caliber Mounted Gun System(MGS) 158 814

Advanced Towed Artillery Guns( Dhanush ATAGS,155mm, 52 calibre) 514

M777 Ultralight Howitzers - Mountain formations 46 145

155mm self-propelled Howitzer guns 48 100

Future Infantry Combat Vehicle (FICV) 500

9 LNG Carriers - GAIL on hire for 20 years 424 9

110 Navy Chopper(Airbus, Bell, Augusta Westland) 200 110

Corvettes 80 8

Aircraft Carrier - 65000 ton and

IAC 2 1


Transmission & Distribution: Orders in this segment are equally split between

domestic and overseas orders. We estimate orders in this segment at INR100b-150b in FY14/FY15. With increased focus of the government on transmission, we are seeing a recovery in orders from SEBs that need to upgrade their networks to 220/400kv. As we highlight in the table below, we expect overall transmission spending to increase to INR2.6t in the 13th plan (+44% YoY) from INR1.8t in the 12th plan. This growth would be led by higher spending in the intra-state transmission network while we expect a slowdown in spending in the inter-state transmission network alongside a slowdown in generation capacity addition. LT is amongst the leading players in the transmission space and well positioned to capture this opportunity.

Exhibit 13: Transmission and Distribution spending in India over the 10-13th plan period Description 11th plan 12th plan 13th plan INR b Total PGCIL Share Total PGCIL Share Total PGCIL Share Transmission

Inter State 550 553 98% 1,250 1,100 80% 1,600 800 50% Intra State 562

0% 550 110 20% 1,000 250 25%

Distribution 1,000 0 0% 3,062 0 0% 2540 254 10% Smart Grid

2,300 230 10%

Smart City

240 24 10%

Total T&D spending 2,112 553 26% 4,862 1,212 25% 5,140 1,304 25% Total (transmission) 1,112 553 50% 1,800 1,210 67% 2,600 1,050 40%


In the overseas markets, we note that Saudi Arabia has been spending aggressively on upgrading its transmission network and players like LT and KEC International have won sizeable orders. The other GCC countries such as Oman, Saudi Arabia, Kuwait are also expected to continue with spending on T&D infrastructure. Heavy Civil Infrastructure: With the uptick seen in metro spending both in India

and the Middle East, this segment should see sizeable orders over the coming

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21 October 2015 10

quarters. LT is already L1 in two packages of the Mumbai Metro Phase-3 worth INR58b-60b. We expect these orders to be booked by 4QFY16. With a number of other cities in India planning to implement metros, we see a large opportunity for this segment. We highlight in the table below some of the key Indian cities looking to implement metros and monorail, which would be a key opportunity for this segment over the coming few years. However, order finalizations are subject to delays due to land acquisition, funding, and approvals that tend to elongate the bid to order cycle significantly. Spending on metros in the GCC also continues, albeit at a slower pace post the sharp fall in oil prices.

Exhibit 14: Planned metro projects in India Name of metro Phase Planned length (km) Cost (INR b) Chennai Metro Phase II 63.0 360.0 Bengaluru Metro Phase II 72.1 264.0 Jaipur Metro Phase II 23.1 65.8 Mumbai Metro Phase III 33.5 244.0 Mumbai Metro Phase II 40.0 64.0 Mumbai Metro Phase IV 32.0 120.0 Mumbai Metro Phase V 10.5 17.0 Mumbai Metro Phase VI 11.0 13.0 Mumbai Metro Phase VII 16.5 6.2 Pune Metro Phase I 31.5 101.8 Kochi Metro Phase II - 15.0 Ludhiana Metro - 28.8 103.0 Chandigarh Metro - 37.6 109.0 Lucknow Metro - 22.9 70.0 Nagpur Metro - 42.0 80.0 Bhopal Metro - 28.0 60.0 Indore Metro - 32.2 75.0 Total

524.6 1,767.9


Exhibit 15: Planned monorail projects Name of Monorail Phase Planned length (km) Cost (INR b) Mumbai Line 2 11.2 15.1 Kozhikode Phase I 14.2 19.2 Thiruvananthapuram Phase I 22.5 27.0 Delhi - 10.8 22.4 Bengaluru Phase I 16.0 25.0 Chennai - 57.0 85.0 Total

131.7 193.7


Railways: The Indian Railways is targeting a capex of INR8.6t over the next five years (INR1.5t-1.7t), which implies a big step-up in spending from the INR0.65t spent in FY15; the FY16 target of INR1 is a 52% YoY jump. However, we note that the opportunity for LT is limited largely to the DFC spending in the overall pie. This is because the typical contract sizes in case of the Railways are extremely small (INR1b) and the competition is severe amongst local contractors to win these orders. It may not make sense for a large player like LT to participate in such tenders.

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21 October 2015 11

The bigger opportunity for LT is from the dedicated freight corridors (DFCs), where the package sizes are much bigger and competition is also limited. We note that LT has won civil packages on the Western DFC (Rewari-Vadodara; 625km) as also the electrification package for the same stretch. The LT-IHI consortium has also recently won the contract for special bridges.

Exhibit 16: Railway spending over the next five years Description FY16-20E Network Decongestion (including DFC, Electrification, Doubling and traffic facilities) 1,993 Network Expansion 1,930 National Projects (North Eastern & Kashmir connectivity projects) 390 Safety (Track renewal, bridge works, ROB, RUB and Signalling & Telecom) 1,270 Information Technology / Research 50 Rolling Stock (Locomotives, coaches, wagons – production & maintenance) 1,020 Passenger Amenities 125 High Speed Rail & Elevated corridor 650 Station redevelopment and logistic parks 1,000 Others 132 Total 8,560


Exhibit 17: Dedicated freight corridor spending Description INR m Construction cost (EDFC) 266,740 Construction cost (WDFC) 461,780 Land Acquisition cost 80,670 Interest During Construction(IDC) 53,160 Total revised cost of construction 814,590


We highlight below our estimates for E&C segment orders over FY15-17. We are building in a 9% growth in FY16 primarily due to lower ordering in the Power and Hydrocarbon sectors. The management has highlighted that there are a few large projects that may get ordered out in 2HFY16 such as Landing Platform Docks (INR80b), Corvettes (INR80b), Power Projects (5GW), Mumbai Metro Phase III (INR55b-60b, where LT is L1), Hydrocarbons, DFC (INR150b), Defense (INR48b self-propelled howitzers), Trans Harbor Link (INR100b), which would help LT reach its guidance. We are a little more circumspect on how much of these orders can really materialize in FY16. Exhibit 18: E&C orders - L&T Group Description FY14 FY15 FY16E FY17E Infrastructure 813,730 857,630 964,460 1,055,906

YoY Growth (%) 43% 5% 12% 9% Power 44,090 151,250 109,030 116,765

YoY Growth (%) -46% 243% -28% 7% Metal and Material Handling 27,240 61,360 70,564 81,149

YoY Growth (%) -48% 125% 15% 15% Heavy Engineering 36,870 49,890 99,780 114,747

YoY Growth (%) -7% 35% 100% 15% Hydrocarbon 97,750 107,160 96,444 106,088

YoY Growth (%) 37% 10% -10% 10% Engineering & Construction 1,019,680 1,227,290 1,340,278 1,474,655

YoY Growth (%) 25% 20% 9% 10%


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21 October 2015 12

The Monitorable Troika E&C execution I Hydrocarbons I Net working capital

In our view, the three key monitorables in LT’s performance would be: E&C execution: In 1QFY16 E&C revenue was up 11% YoY (albeit off a weak base

of 1QFY15) – though domestic revenue declined 2% YoY, overseas revenue grew 58% YoY. We build in a pick-up in execution in the domestic segment in 2HFY16 and build in 16% growth for FY16 consolidated E&C revenues. Within E&C, the three segments driving growth during FY16 are (a) Infrastructure, which is estimated to grow at 17%, (b) Power, which should grow 18%, as orders won in FY15 start contributing meaningfully to revenue in 2HFY16, and (c) Hydrocarbons: 17% growth.

Hydrocarbon profitability: In the Hydrocarbons segment, execution pick-up and trend in provisions (1QFY16 EBITDA at INR0.9b) are key monitorables. LT had booked an EBITDA loss of INR11.3b in FY15, as it had to book provisions for time and cost over-runs in five jobs it was executing in the Middle East. According the management, there are still three jobs awaiting closure and there could be an EBITDA loss of USD20m-25m at the operating level in FY16 due to the closure costs for these projects. The quantum of closure costs on these projects is a key monitorable in the next three quarters.

Net working capital: LT’s net working capital (NWC) had deteriorated to 25% of consolidated revenue in 2QFY16, and is largely driven by vendor support, lower customer advances, etc. We expect a slow revival in NWC over the next 1-2 years, with a cyclical pick-up in the economy, but a return to 10-15% of sales does not appear likely in the near to medium term.

E&C execution: Expect uptick in domestic projects E&C revenue declined 1% in FY15 (up 5% in FY14), impacted by (1) largely stagnant order intake at INR550b-600b per year (excluding slow moving orders) during FY10-14 in India, resulting in muted domestic E&C revenue growth (-3% YoY), (2) ~40% decline in Hydrocarbons (given project-specific issues), which impacted overseas execution, and (3) sharp revenue decline in the MMH and Heavy Engineering segment, coming off a depleted order book.

Exhibit 19: Consolidated E&C : Domestic order wins witness an upswing in FY15 after being flat over FY10-14


Exhibit 20: Consolidated E&C: Overseas orders head lower on fall in oil prices


669 537

670 627

943

10

(20)

25

(6)

50


Domestic Orders YoY growth

67

152 145 393

284

131 127

(5)

171

(28)


Overseas YoY growth

#1

Larsen & Toubro

21 October 2015 13

Exhibit 21: Consolidated E&C : Order mix now tilting back towards domestic market


Exhibit 22: Consolidated E&C order growth v/s domestic E&C order growth


For FY16, the management is guiding 15% growth in sales, which implies that core E&C sales would also need to grow 12-14%. We believe that LT should be able to meet and/or come close to its guidance given the following: After four years of stagnant domestic E&C orders, LT saw a 50% increase to

INR943b in FY15. This was driven by large project orders in power, rail, metros, roads, MMH and T&D. We expect these orders to start contributing meaningfully from 2HFY16 and drive domestic E&C growth.

Some of the large domestic projects won over the last 2-3 years are expected to start contributing meaningfully in FY16. These include (a) Western DFC order (INR67b; FY14), which has seen a six-month delay, (b) RRVUNL Chabra (INR57b; FY14), which has seen delays on lack of EC for the 2nd unit, but this has been resolved, (c) MP Genco Shri Singajee Stage II (1,320MW, INR50b; FY15), (d) NTPC Tanda boiler (1,320MW, INR19b), delayed on lack of land, (e) NTPC Khargone (1,320MW, INR56b), (f) Statue of Unity (INR30b), and (g) Lucknow-Unnao Expressway (INR16b). However, we note that there is a slowdown in execution in the B&F segment, given the slow offtake of flats from developers. However, we are starting to see a pick-up in commercial offtake.

Exhibit 23: Key domestic order wins over last few years Date Description Execution period (months) Size (INR m) Apr-13 Western DFCC (L&T-Sojitz JV) 67 55,000 Apr-13 RRVUNL Chabra plant 48 56,890 Dec-13 Orissa road order 20 13,000 Jul-14 BSNL order for laying optic fibre network for defence 30 24,420 Jul-14 Cable stayed bridge across Mandovi river in Goa 30 15,470 Sep-14 MP Genco Sri Singajee Stage II 48 50,000 Sep-14 NTPC 1320MW Tanda Boiler 48 18,850 Oct-14 WDFCC Rewari-Baroda electrification order with Sojitz 55 25,920 Oct-14 Expressway project in UP from Lucknow to Unnao 48 16,300 Nov-14 Statue of Unity at Gujarat 60 29,890 Mar-15 NTPC Khargone 1320MW 60 55,800 Mar-15 Delhi PWD for elevated corridor Phase III Barapullah elevated corridor 45 16,640 Mar-15 NHAI - 287 kms for Rewa-Katni-Jabalpur package 30 26,500 Jun-15 ONGC well platforms 30 27,150


95% 91% 78% 82%

61% 77%

2% 5% 12% 12%

32% 23%

FY10 FY11 FY12 FY13 FY14 FY15

Domestic E&C Overseas E&C

15%

-6% 18% 25% 20% 10%

-20%

25%

-6%

50%

-40%

-20%

0%

20%

40%

60%


Consol E&C Orders growth Domestic E&C Order growth(%)

Larsen & Toubro

21 October 2015 14

Overseas E&C growth in FY15 was constrained at 6% on account of decline in order book; revenue in the Hydrocarbon segment fell 40% on project-specific issues. A sharp 40% increase in order backlog in FY15 on the back of the INR50b Kuwait Oil Company order should reverse this trend. More importantly, we expect overseas Infrastructure orders to largely remain on track (barring the Riyadh Metro, where media reports indicate a possible delay of two years and some cut in spending) and this would ensure robust overseas E&C execution – we build in 25% growth in overseas E&C execution for FY16.

Exhibit 24: Key overseas projects won by L&T

Date Description Execution period

(months) Size (INR m)

Jun-13 Midyan Gas project (Saudi Arabia) 36 16,500

Jun-13 Delma JV - road order 36 15,000

Jul-13 Riyadh metro - 41kms 48 82,500

Jul-13 4th package of Al Batinah Expressway 36 20,650

Dec-13 Qatar substation order - Kahrama 36 29,350

Mar-14 Batinah Expressway, Oman 36 15,500

Mar-14 ASHGAL road order. Qatar 36 36,550

Apr-14 Doha metro Gold line, Qatar 54 45,100

May-14 Bangladesh Gas power plant orders(225MW and 360MW) 45 28,800

May-14 Qatar substation order 36 14,700

Jul-14 Kuwait Oil Company – Oil Gathering Centre 45 50,760

Dec-14 EPC order from Algerian Transmission Utiility 30 13,770

Sep-15 400MW Bangladesh gas plant order 48 17,000

Sep-15 Ballast less tracks for the Riyadh Metro 48 10,700


Exhibit 25: Domestic E&C execution growth was impacted given constrained macros and flat orders over FY10 -14


Exhibit 26: Overseas E&C revenue was impacted by project-specific challenges in hydrocarbons


340

419

467 471 457 29.8

23.2

11.5

0.9 -3.0


Domestic Revenue YoY growth

37 46

130 153 162

-33.9

24.3

182.6

17.6

6.0


Overseas YoY Growth

Larsen & Toubro

21 October 2015 15

Exhibit 27: Domestic E&C execution growth expected to pick up in 2HFY16


Exhibit 28: Overseas E&C revenue was impacted by project-specific challenges in hydrocarbons


Sensitivity analysis of large overseas projects shows 2-3% impact on FY16/FY17 sales and EPS on two-year delay in execution To address the street’s concerns on impact of the fall in oil prices on LT’s overseas projects, we identified LT’s large overseas project wins over the last two years and which are under execution (large projects defined as projects >INR15b in value). In our view, the large projects are more likely to face a slowdown and deferral in execution than smaller projects which are more likely to sail through without much of a liquidity crunch. We list the large projects below:

Exhibit 29: Analysis of large overseas orders in the order book

Date Description Execution period (months) Value (INR m) Months

complete Value in

Order book

Jun-13 Midyan Gas project (Saudi Arabia) 36 16,500 27

Jun-13 Delma JV - road order 36 15,000 27 3,583

Jul-13 Riyadh metro - 41kms 48 82,500 26 77,550

Jul-13 4th package of Al Batinah Expressway 36 20,650 26 5,507

Dec-13 Qatar substation order - Kahrama 36 29,350 21 11,985

Mar-14 Batinah Expressway, Oman 36 15,500 18 7,621

Mar-14 ASHGAL road order. Qatar 36 36,550 18 17,970

Apr-14 Doha metro Gold line, Qatar 54 45,100 16 41,041

May-14 Qatar substation order 36 14,700 16 8,058

Jul-14 Kuwait Oil Company 45 50,760 14 34,705

Dec-14 EPC order from Algerian Transmission Utiility 30 13,770 9 9,578

Sep-15 Ballast less tracks for the Riyadh Metro 48 10,700 0 10,700

Total

232,239


Our analysis shows that of the ~INR600b of overseas projects, large projects constitute ~INR232b in the order book. Most of these projects are to be executed in 3-4 years. If we assume all these projects are delayed by two years due to the sharp fall in oil prices, there would be an impact of INR23b-35b (2-3% of LT’s overall sales) in each of FY16 and FY17.

34

58 63

34

56

41 55

36

15

8

-12

42

13

38

69

14 27

23

25

21

22

6

-6

3 -1

11

13

8 5 3

-3

-10

-2

2

1QFY

08

3QFY

08

1QFY

09

3QFY

09

1QFY

10

3QFY

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

1QFY

13

3QFY

13

1QFY

14

3QFY

14

1QFY

15

3QFY

15

1QFY

16

Domestic Revenues (% YoY)

5 29

55

57

105

61

33 50

30

32

14

-2

2 -3

7 -4

9 -4

4 -7

-1

3 22

37

49

120 14

4 19

1 66

19

39

9 33

-3

7 12

4

47 61

25

1QFY

08

3QFY

08

1QFY

09

3QFY

09

1QFY

10

3QFY

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

1QFY

13

3QFY

13

1QFY

14

3QFY

14

1QFY

15

3QFY

15

1QFY

16

Overseas Revenues (% YoY)

Larsen & Toubro

21 October 2015 16

More importantly, the key assumption here is that any cost escalations as a result of the delays are reimbursed by the customer. Hydrocarbons: Execution / margin trend and liquidated damages During FY15, L&T Hydrocarbons had reported a sharp deterioration in operating

performance, with revenue declining 27% to INR73b and EBITDA loss of INR11.3b. In FY14 too, Hydrocarbons was the key disappointment, with EBITDA margin of just 3% v/s 11.6% in FY13. In 2QFY16, the business achieved EBITDA of INR0.9b, which was a positive surprise, given the continued losses of INR500m-700m/quarter towards under-recovery of fixed overheads.

The losses were pertaining to five overseas customers (two upstream and three mid/downstream), with an aggregate value of INR100b. There are three projects, which are still under execution and expected to be completed by the end of FY16, indicating that the performance of this division may continue to be under pressure. LT continues to negotiate with the customers and is looking for early closure of these jobs.

During the 1QFY16 post results concall, the management highlighted that the onerous contracts are likely to be completed in the next 6-9 months. There exists possibility of certain incremental costs being booked and the max impact could be USD20m-25m. Post project completion, LT would also raise claims with the customers and would be accounted for on receipt basis.

Exhibit 30: Hydrocarbons: Operating performance impacted; 1QFY16 EBITDA positive (INR m)

FY14 FY15 % YoY 4QFY14 4QFY15 % YoY 1QFY15 1QFY16 % YoY

Order Inflows 98,000 107,160 9.3% 8,330 6,990 -16.1% 57,040 34,750 -39.1%

Revenues 100,110 73,150 -26.6% 22,525 22,150 -1.7% 15,530 22,070 42.1%

- Domestic 37,280 36,610 -3.2% 11,025 13,450 22.0% 7,600 11,035 45.2%

- Exports 62,290 36,900 -40.8% 11,500 8,700 -24.3% 7,930 11,035 39.2%

EBIDTA 2,980 (11,321) -479.9% -1,216 -1,506

(8,910) 927 -110.4%

EBIDTA Margins % 3.0% -15.4% -5.4% -6.8% -57.4% 4.2%


Exhibit 31: Hydrocarbons: Key project wins in overseas markets Award Project Details INR M Country 1QFY12 PTTEP International (Zawtika Development Project, Phase-1A) 13,413 Myanmar 1QFY12 Technimont-Samsung JV (Construction of PO and LDPE plant) 3,250 UAE 2QFY12 Abu Dhabi Gas Inds (EPC pipeline) 8,390 UAE 2QFY12 Abu Dhabi Marine Operating Company (EPC Field Development) 19,620 UAE 2QFY12 Petroleum Development Oman (Gas treatment plant) 7,000 Oman 2QFY12 Petroleum Development Oman (EPC of Lekhwair Gas field development) 7,010 Oman 2QFY13 Petroleum Development Oman (EPC of Saih Rawl Depletion Compression) 13,020 Oman 3QFY13 Carigali Myanmar (Offshore EPC, installation & commissioning) 5,500 Myanmar 1QFY14 Midyan Field (Gas Processing and Transportation) 16,500 Saudi Arabia 2QFY14 Petroleum Development Oman (EPC for Yibal 3rd stage depletion compression) 15,000 Oman 3QFY14 EPC for ATF Terminal at Abu Dhabi Airport & gas interconnecting facilities 11,000 UAE 1QFY15 Kuwait Oil Company (EPC contract for a Oil gathering centre) 50,760 Kuwait


#2

Larsen & Toubro

21 October 2015 17

NWC impacted by twin factors; at cyclical high Net working capital (NWC) has remained stable albeit at high levels of 25% of

revenue in 1QFY16 and is largely driven by vendor support, lower customer advances, etc. We believe that the changes in NWC are led by cyclical factors of customer advances / retention money, and with improved order intake, these factors should correct in FY17/FY18.

Exhibit 32: Segmental NWC elevated on a combination of cyclical factors/tight liquidity


Customer advances as a percentage of order book declined to 5% in FY15 from

the 7-9% levels seen at the peak. This fall is largely due to (a) tight liquidity in the market (customers reduce advances paid to suppliers), and (b) low ordering volumes, implying that orders need to be taken even where advances may be lower than the norm of 10-12%. We expect customer advances to start increasing once again with a pick-up in ordering.

Retention money has touched cyclical highs at 11%, as delays in project

execution and extended timelines led to delays in receipt of payment from customers. With a pick-up in execution from 2HFY16-FY17, we expect retention money to have peaked and should be released faster hereon.

Exhibit 33: Customer advances (% of order book) have deteriorated


Exhibit 34: Retention money (% of revenue) remains at elevated levels


11% 8% 9% 9% 8% 8%

10% 13% 13% 13%

15% 17% 17% 15% 17% 18%

20% 22%

24% 25% 25% 25% 25%

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

NWC as % of sales

8.8%

7.8%

7.3%

6.5%

6.7%

6.9%

7.0%

7.4%

6.7%

6.2%

5.1%

4.5%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Customer Advances (% of OB)

2.6%

4.8%

5.8%

5.5%

5.2%

5.9%

7.0%

9.0%

11.7

%

11.9

%

11.1

%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Retention Money (% of Revenues)

#3

Larsen & Toubro

21 October 2015 18

Correcting the capital structure a priority Monetization of assets a step in the right direction

Since FY07, LT’s investments in subsidiaries (including loans and advances) have risen from INR13b to INR204b. These now constitute 41% of its standalone capital employed – LT has invested in setting up manufacturing facilities for Shipbuilding, Power BTG JVs, and fabrication yards in Sohar and Hazira, as also in developing its Services and Infrastructure (Power, Roads, Metro) business. Standalone ROE’s have been depressed due to the investments made in these subsidiaries since FY07. Standalone ROE’s are at 13% in FY15 but if we adjust for the investments made in subsidiaries and associates, the core E&C ROE stands at 21% which clearly illustrates how the substantial growth in investment/loans and advances to subsidiaries has depressed ROE’s. The ROE’ made by the subsidiaries stood at a low 3% in FY15.

Exhibit 35: Standalone ROE’s and core E&C ROE’s excl. subs


Exhibit 36: Subs ROE’s remain depressed on losses


Larsen is consciously working towards correcting this capital allocation and has been looking to divest its non -core assets in orders to improve core ROE’s. We also note that the ROE’s earned by subsidiaries has remained quite dismal as most the manufacturing and developmental projects are incurring losses which ifs offsetting the profits mad by the services businesses Of the total investments made in subsidiaries/associates, we note that the biggest chunk has been contributed by Infrastructure Development Private Limited (IDPL), Power Development, L&T Shipbuilding, Seawoods, L&T Finance Holdings, L&T Forgings, IT&TS and L&T Hydrocarbons which total INR160bn (80% of the investment/loans and advances given by the parent).

25.1 21.0

18.3 18.9 16.8 14.2 15.6 13.3 13.0

38.3

29.5 30.1 30.0 24.5 22.2

25.9 21.3 20.6

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

RoE RoE(Core E&C business ex investment in subs) 9.8

6.4 5.5

2.8 3.4 4.5

4.2

FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Subsidiary ROE

Larsen & Toubro

21 October 2015 19

Exhibit 37: Equity/loans given to subsidiaries breakup, FY15


Exhibit 38: Equity investments/Loans and advances to Subs


If we analyze the segmental capital employed at a consolidated level, we find that the core E&C business now accounts for only 30% of the capital employed. Developmental Projects (31%), Financial Services (9%), IT&TS (4%), and Others (12%) together constitute 56% of the total capital employed. Understanding these segments is, therefore, critical. More importantly, returns on developmental projects need to improve to drive overall consolidated RoCE higher. Divesting stakes in developmental businesses (32% of capital employed) or a complete exit would be the ideal scenario to increase RoCE, in our view

Exhibit 39: Capital employed break-up by segment (FY14)


Exhibit 40: Capital employed break-up by segment (FY15)


We note that in FY15, subsidiaries accounted for ~38% of consolidated sales (INR350b) and 43% of EBITDA, but only 15% of consolidated PAT. As the developmental subsidiaries (Roads, Port) and the manufacturing subsidiaries (Shipbuilding, Special Steel and Heavy Forgings) are currently making losses, LT’s consolidated RoE is depressed (11% in FY15). We highlight below the management’s plans in each of these businesses to unlock/divest assets. Power Development: This primarily comprises Nabha Power, where equity

investment and loans from LT are at INR28b for setting up the 2*700MW super-critical at Rajpura in Punjab. Both the units have been commissioned and it

Hydro carbon, 8%

IDPL, 14%

Finance Holdings,

8%

Power Developnt,

14% Forgings, 5%

Seawoods, 15%

Shipbldng, 9%

IT&TS, 6%

Others, 22%

13 26 53 76 105 126 140 189 204

16.8 20.0

28.3 30.7 36.9 35.9 36.9

41.8 40.7

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Total Invst, incl Advances in Subs

% of CE in Subs (Equity + L&A)

E&C, 32%

E&A, 3%

IT&TS, 3% Financial Services,

9%

Develpmnt Projects ,

32%

Others, 12%

Unallocable, 9%

E&C, 30%

E&A, 3%

IT&TS, 4% Financial Services,

9%

Develpmnt Projects ,

31%

Others, 12%

Unallocable, 10%

Larsen & Toubro

21 October 2015 20

earned a profit of INR1.9b in FY15. As per media reports, LT is looking to sell this asset and given that it has both PPAs in place and coal linkge from Coal India, we expect LT to be able to sell this asset and at least recover the investment made. We do not expect further investments in this asset.

IDPL: INR27b had been invested in this business, which primarily comprises the

road concession, Hyderabad Metro and the Kudgi transmission line. We estimate that INR20b-25b would need to be invested further, primarily for the Hyderabad Metro – IDPL has already got the Canadian Pension Fund to invest INR20b and no further funding from the parent would be needed. As per media reports, LT is looking to form an infrastructure investment trust using five road assets and list it to raise INR20b next year. (http://www.livemint.com/Companies/HwNbdeOpKsqaAULuJILZ0J/LT-to-list-five-road-assets-via-infrastructure-investment-t.html)

L&T Finance Holdings: LT has already started to monetize its stake in Finance

Holdings and has bought it down to 64% post the recent stake sale to Bain Capital. We understand that LT would be looking to further bring down its stake over the next few years. Its total investment currently stands at INR15.8b.

L&T Seawoods: LT has invested INR30b in Seawoods, which is part of the transit

oriented development at Navi Mumbai. The development is over 40 acres of land around the Seawoods railway station and was awarded to L&T Realty in 2008. It consists of a retail mall, office complex and a hotel cum service apartment. LT had won the rights to develop the Seawoods project from CIDCO for INR18b as lease premium plus the cost of the railway station construction is INR1.86b. Construction is in full swing and the retail mall is expected to be complete by December 2015. We estimate the total cost of the project at INR50b on completion of all the phases. On completion, the project would have retail space of 1.7msf, of which Blackstone is looking to buy ~1msf. As per our estimate, a total of 6.2msf can be developed at this site.

L&T Shipbuilding: LT has invested INR45b in the yard cum container terminal at

Katupalli in Tamil Nadu and the parent has already provided INR18b as equity and loans. The yard was built with a capex of INR18b for manufacture of commercial and defense ships while the port was built with a 1.2m TEU annual capacity. The port and yard went operational by FY13, but by then the demand for commercial ships had completely dried up. LT is scouting for naval orders. With the new government push towards “Make In India”, there are quite a few large orders (ships, submarines, landing platform docks) in the pipeline. The port too has been under-utilized, as there have been delays in obtaining customs clearances combined with intense competition from nearby ports. Recently, Adani Ports has taken up the O&M contract for this port and we see this as a precursor to a complete sale. We estimate the port’s losses at INR2.8b in FY15.

L&T Hydrocarbons: The hydrocarbon business has been going through a rough

patch over the last year, having seen cost and time overruns in key projects in the Middle East. The management expects to achieve closure on these projects

Larsen & Toubro

21 October 2015 21

by FY16-end, and thereafter, this business is expected to return to profitability. The management indicates that the T&D business would be listed in CY17 and the hydrocarbon business would be listed in CY18.

IT&TS: LT is looking to list its IT unit by December 2015, and as per media

reports, is likely to dilute 10-12% stake for INR16b-18b (total valuation of USD3b). This is being done to unlock value and also attract new talent. Key customers for the Infotech division are GE, P&G, Hitachi, Chevron and Travellers Group. Parallel to the IPO, it is also hiring 40 key managers and a new CEO is already on board. Clients are also being limited to 200; it has removed clients from whom revenues were not exceeding USD1m. After Infotech, Engineering Services (TS) will get listed by July 2016.

Exhibit 41: Consoliated Debt by business segment (INR M) Description FY14 FY15 FY16E FY17E SA debt 114,589 129,365 140,865 152,365 Road Projects 116,990 131,786 133,380 140,230 Power Development 58,421 75,152 70,142 65,132 Hyderabad Metro 25,717 45,617 138,940 155,580 Property Development 34,128 24,724 24,724 24,724 Power Equipment JV's 19,546 15,791 17,291 18,791 L&T Shipbuilding incl. ports 33,648 39,341 40,341 40,341 L&T Special Steel and Heavy Forgings 14,741 17,589 17,589 17,589 Dhamra Port 14,955 0 0 0 Hyrdocarbons 12,030 11,636 11,636 11,636 Others (1,770) (6,194) (6,194) (6,194) Sub total (ex finance subs) 442,995 484,809 588,715 620,195 Finance subs(linked above) 358,534 420,905 441,950 450,789 Total debt on the consolidated balance sheet 801,529 905,714 1,030,665 1,070,984


Exhibit 42: Contribution towards consolidated earnings from subsidiaries INRm FY14 FY15 FY16E FY17E Standalone PAT (recurring) 49,047 46,991 50,857 61,898 PAT for the subsidiaries

Power : L&T - MHI subs 310 346 915 1,413 L&T Shipbuilding -Katupalli yard (3,695) (3,649) (3,635) (3,605) L&T Special Steel and Heavy Forgings (3,345) (2,798) (2,879) (2,862) Infrastructure subs (1,184) (2,139) (977) (507) Electrical and Automation 1,162 822 1,137 1,241 Machinary and Industrial Products 1,094 1,514 2,097 2,349 Hydrocarbon subs 113 (9,393) (2,887) 358 Infotech and Technology Services 6,427 11,121 13,923 15,921 Finance subs 4,961 6,165 7,664 8,982 IDPL(incl. power development, roads, metro, Kattupalli Port) (3,069) 4,455 (6,351) (13,264) Property Development 2,046 2,078 3,105 3,490 Total 4,819 8,521 12,114 13,517 PAT from associates 93 21 21 21 Total subs + associates 4,912 8,543 12,135 13,538 Less Minority interest 382 (1,710) (1,911) (2,862) Contribution from subsidiaries 5,294 6,833 10,224 10,676 Subsidiaries as % of consol PAT 12% 15% 21% 18%


Larsen & Toubro

21 October 2015 22

In the following pages, we do a deep dive into the key manufacturing and services segments and highlight the opportunities and challenges over the next few years:

L&T Special Steel and Forgings – significant underutilization on low orders L&T Special Steel and Forgings is a JV between LT and Nuclear Power Corporation of India, with LT holding 74% stake. This JV was set up at Hazira with the objective of supplying heavy forgings for use in nuclear power, hydrocarbons, fertilizers, power and general engineering applications. The facility was set up with a cost of INR19b, of which INR12b is debt. It has a capacity to manufacture 0.1mTPA of special steel and 40kTPA of heavy forgings. A technology transfer has also been done with Japan Steel Works for melting and heavy forgings made from steel ingots of up to 200tons, which is another new opportunity for the unit. The facility began operations in FY13 and had sales of INR1b and PAT loss of INR2.8b in FY15. In an environment of intense competition from foreign players alongside a depressed market environment for nuclear equipment (post the Fukushima nuclear accident), the unit remains highly underutilized at just 8-10% capacity utilization (can potentially touch INR14b-15b of sales at full capacity). Exhibit 43: Process flow in the special steel and heavy forgings workshop

Source: Company, MOSL

As per our estimates, it would need to do sales of INR6b-7b to break even, as it has fixed costs of INR2b-2.3b and can achieve EBITDA margin of 35-40%. At full capacity, this unit can achieve sales of INR14b-15b. We expect FY16/FY17 losses to remain at the same level as in FY15 in the absence of any large orders being won till date. We note that the business could need more equity infusion as its net worth has turned negative post continued losses in FY14 and FY15.

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21 October 2015 23

We expect new orders to flow from investments and upgrades in the hydrocarbon space in the US, Middle East, Iran and South East Asian markets. Domestic fertilizer investments and nuclear projects are likely to be tendered as well in FY16; key nuclear power opportunities relate to the NPCIL Hissar plant reactors (700MW*4) and Phase II of the Kudankulam plant in Tamil Nadu. We note that LT has tie-ups with key foreign technology providers (Areva, GE-Hitachi, Westinghouse) in the nuclear space. With the resolution of the Civil Nuclear Liability Clause with the set of an indemnity pool, we expect nuclear power plants with foreign technology to be set up in India. This would result in orders for this unit over the next two years – we have not built in any large forgings order in our estimates for FY16 and FY17.

Exhibit 44: L&T Special Steel and Heavy Forgings Description FY14 FY15 FY16E FY17E

Revenues 649 1,020 1,173 1,349

YoY growth (%) 361% 57% 15% 15%

Raw material costs (580) (771) (863) (939)

Gross margins (%) 11% 24% 26% 30%

Employee costs (209) (227) (238) (250)

SG&A Costs (1,040) (808) (888) (977)

EBITDA (1,181) (786) (817) (818)

Margins (%) -182% -77% -70% -61%

Other income 6 3 27 27

Depreciation (922) (486) (479) (462)

EBIT (2,103) (1,272) (1,296) (1,279)

Interest expense (1,245) (1,526) (1,583) (1,583)

PBT (3,348) (2,798) (2,879) (2,862)

Tax expense - - - -

PAT (3,345) (2,798) (2,879) (2,862)


L&T Shipbuilding – sharp losses on underutilization and slow ramp-up of port operations L&T Shipbuilding operates the Katupalli shipyard and port at Katupalli, 40km from Chennai in Tamil Nadu and FY14 was the first full year of commercial operation. An investment of INR40b has been made in this project, with LT holding 97% stake; the balance is held with TIDCO. L&T Shipbuilding has a technical collaboration with Mitsubishi Heavy Industries for design and construction of commercial ships. For FY15, sales were INR5.9b while EBITDA loss was INR2.2b; the loss was due to high operating costs amidst underutilization of the port and yard. PAT loss was at INR6.7b – at similar levels as in FY14. It has fixed costs of INR4.5b every year and would need sales of INR20b to break even (~25% blended EBITDA margin). Since this business has been making losses since commissioning, its net worth has been wiped off – we expect the parent to infuse cash to sustain the business. We note that Adani Port has entered into a non-binding MoU with L&T Shipbuilding to evaluate the O&M operations of the Katupalli port. The EBITDA gains/losses would accrue to Adani while the non-operating gains/losses would be retained by LT. In our view, this is a precursor to a complete sale of the port to Adani Ports. LT has been looking to divest its non-core assets.

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Katupalli Shipyard Katupalli Shipyard had an order book of ~INR20b as at the end of FY14 and is geared to manufacture commercial and naval ships. During the year, it bagged orders worth INR14.3b for seven offshore patrol boats. In FY15, the yard had sales of INR5.7b and EBIT loss of INR2.6b; we estimate PAT loss of INR4.1b. With the commercial shipping market expected to remain in a downturn for another two to three years, order prospects remain bleak. However, with the technology tie-up with Mitsubishi Heavy, the company is looking to bag orders for LNG carriers, ethane carriers and other specialized offshore vessels. With the shoreline in Katupalli, medium-size vessels up to 200metres can be built at this yard. The focus is to get orders from domestic shipping companies for such commercial vessels. The management is more optimistic of winning orders from the defense segment post announcement of the New Defense Procurement Policy in 2013 and the new government’s focus on “Make in India”. It has cited that two landing platform docks (LPDs) have been tendered to domestic private yards, which is a large opportunity (INR40b each); these would have to be built over 3-4 years while another two would be built by DPSUs. Another tender for INR80b for corvettes is also likely to be finalized by 4QFY16/1QFY17. We are not building in either of these orders in our estimates for FY16 – we expect LT to win at least one of these orders in FY17. The orders for the six submarines (Project 75 I) are also likely to be finalized only by FY17/18.

Exhibit 45: L&T Shipbuilding financials (including Katupalli yard and port) Description FY14 FY15 FY16E FY17E

Revenues 5,326 5,928 7,924 9,285

RM & Manufacturing costs (6,135) (6,135) (6,901) (7,220)

Gross Profit (809) (207) 1,023 2,065

Gross margin(%) -15% -3% 13% 22%

Staff costs (651) (695) (765) (841)

SG&A Expenses (458) (1,298) (1,428) (1,571)

EBITDA (1,918) (2,201) (1,170) (347)

Margins(%) -36% -37% -15% -4%

Other income 129.4 33.8 19 19

Interest expense -2,774 -3,020 -3,934 -4,034

Depreciation -1,791 -1,514 -1,463 -1,404

PBT (6,484) (6,735) (6,547) (5,766)

Tax expense (9) 0 0 0

Net PAT (6,475) (6,735) (6,547) (5,766)

Source: MOSL, Company Katupalli Port The Katupalli Port has a 1.2m-ton capacity, with two container berths. Katupalli Port operations remain affected owing to lack of export connectivity on customs side due to delays in the necessary government approvals. The relevant export connectivity approval was issued in January 2015 for EXIM trade, allowing the Container Freight Station (CFS) at Katupalli to select Katupalli Port for exports as well as imports. As

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per management, in FY16, Katupalli Port is targeting volumes of 0.3-0.4m TEUs. In FY15, the port had sales of INR0.2m, EBIT loss of INR1.13b, and PAT loss of INR2.6b. We also note that Adani Port has entered into a non-binding MoU with L&T Shipbuilding to evaluate the O&M operations of the Katupalli Port. The EBITDA gains/losses would accrue to Adani while the non-operating gains/losses would be retained by LT. In our view, this is a precursor to a complete sale of the port by L&T Shipbuilding to Adani Ports. LT has been looking to divest its non-core assets and this would be a step in this direction. Developmental projects – Hyderabad metro a key monitorable LT has a developmental portfolio spanning roads, metro, transmission and port. It is the largest road concessionaire in India, with 17 road projects and a total estimated project cost of INR182b. It is also developing the Hyderabad Metro (INR170b), Kudgi Transmission Line (INR14b), Nabha Power (INR70b) and Ports.

Profitability of road assets hit by higher periodic maintenance costs LT is the biggest road concessionaire in India, with a portfolio of 17 road assets, of which 15 have become operational. Total project cost is INR183b (excluding the two road assets terminated in Maharastra), while total equity invested is INR36b. FY15 net toll collections were INR11.3b v/s INR9.3b in FY14 – a growth of ~25%. According to the management, volume growth was 15%; the growth in toll collections was also on account of higher tolling charges. We note that in FY15, PNG Tollway and Devihalli-Hassan got partially commissioned; this also helped improve toll revenue. EBITDA margin in FY15 was 64%, as major maintenance work was completed for five road projects during the year – Vadaodara-Bharuch, Panipat Elevated Corridor, Western Andhra Tollway, Palanpur-Swaroopganj, and Krishnagiri-Thopur Tollway (see exhibit below). We expect EBITDA margin to improve over the next two years to 72%, as the recently-begun road projects stabilize and margins begin to expand again. However, at the PAT level, we expect the road portfolio to continue making losses over the next few years.

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Detailed Road portfolio financial Analysis

Major SPVs Net toll collections (INR m) EBITDA (INR m) EBITDA margins (%) PAT (INR m)

Roads and Bridges: FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E FY14 FY15 FY16E FY17E

L&T Panipat Elevated Corridor Limited - Haryana(6 laning) 519 580 638 702 257 437 480 561 50% 75% 75% 80% (466) (231) (497) (416)

Narmada Infrastructure Construction Enterprise Limited 0 0 0 0 0 0 0 0 0% 0% 0% 0% 0 0 0 1

L&T Krishnagiri Thopur Toll Road Limited(TN) 1,060 1,291 1,421 1,563 636 772 991 1,090 60% 60% 70% 70% (267) (106) 117 245

L&T Western Andhra Tollways (Jadhcheria-Kothakota) 504 561 623 691 100 324 436 484 20% 58% 70% 70% (358) (124) 10 60

L&T Transportation Infrastructure-Coimbatore Bypass(TN) 243 248 261 274 137 150 184 193 56% 60% 70% 70% 246 112 72 99

L&T Interstate Road Corridor(Palanpur-Swaroopganj) 864 864 864 864 693 547 547 607 80% 63% 63% 70% 8 (43) -22 33

L&T Vadodara Bharuch Tollway Limited 2,489 2,775 3,053 3,358 1,610 2,352 2,587 2,846 65% 85% 85% 85% (849) 1 170 471

L&T Rajkot Vadinar Tollway Limited -FY13(Gujarat) 693 858 952 1,057 460 517 574 743 66% 60% 60% 70% (125) 1 (610) (441)

PNG Tollway Limited - FY13 onwards 371 786 904 1,040 200 505 588 780 54% 64% 65% 75% (324) (1,541) (1,195) (1,003)

L&T Ahmedabad-Maliya Tollway Limited -FY13(Gujarat) 1,132 1,193 1,324 1,470 807 797 885 982 71% 67% 67% 67% (991) (307) (181) (83)

L&T Halol - Shamlaji Tollway Limited -FY13(Gujarat)-default 770 688 722 758 473 304 506 531 61% 44% 70% 70% (269) (1,157) (926) (901)

L&T Devihalli Hassan Tollway Limited- FY14 104 298 328 361 109 133 229 252 105% 45% 70% 70% (30) (148) (57) (47)

L&T Chennai Tada Tollway - defaulted on debt payment 545 569 367 0 0 0 67% 67% 343 (629) 0 0

Krishnagiri Walajahpet Tollway Limited -FY14(Q315 started) 697 1,370 1,439 444 873 917 - 64% 64% 64% 771 (107) 93 137

L&T Samakhiali Gandhidham Tollway Private Limited -FY15 89 1,300 1,365 77 780 819 - 87% 60% 60% 12 (37) (692) (653)

L&T BPP(Beawar-Pindwarara) Tollway Limited-Q116 onwards 0 0 2,472 2,719 0 0 742 1,903 - 0% 30% 70% 0 1 (2,129) (692)

L&T Deccan Tollway(Sangareddy - MH/KNT border) 0 0 0 0 0 0 0 0 - - - (0) - 0

L&T Sambalpur - Rourkela(Orissa) 0 0 0 1,450 0 0 0 435 - - 30% - - - (901)

Total 9,196 11,293 15,996 17,389 5,796 7,229 10,249 12,506 63% 64% 64% 72% (2,214) (3,914) (5,537) (3,831)

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Hyderabad metro to incur losses over first few years of operation; divestment may not be easy L&T Metro Rail signed a concession agreement with the Government of erstwhile Andhra Pradesh on September 4, 2010, to construct, operate and maintain the metro rail on three elevated corridors from Miyapur to LB Nagar, Jubilee Bus Station to Falaknama, and Nagole to Shilpramam in Hyderabad, covering a distance of 71.1km and related real estate development on a BOOT basis for 35 years, extendable for another 25 years. A viability gap funding of INR14.5b has been received and the total project cost is estimated at INR170b.

Exhibit 46: L&T Metro Rail – corridors along with initial planned dates and our estimates Corridor Number Corridor Details Distance Originally Planned Estimate Corridor I Miyapur to LB Nagar

Stage 2 Miyapur to S R Nagar 11.9 Apr-16 Jul-16 Stage 5 S R Nagar to L B Nagar 17.3 Apr-16 Aug-17 Corridor II Jubilee Bus Station to Falaknuma

Stage 6 JBS to Falaknuma 15.2 Dec-16 May-17 Corridor III Nagole to Shilparamam

Stage 1 Nagole to Mettuguda 8.0 Mar-15 Apr-16 Stage 3 Mettuguda to Begumpet 8.3 Nov-15 Jul-16 Stage 4 Begumpet to Shilparamam 11.0 Aug-16 Jan-17

Source: MOSL, Industry As per media reports, there may be a INR20b cost escalation as a result of the realignment requested by the Telengana government at three locations. We have assumed that the total cost of the project would go up to INR190b, of which INR14.5b is VGF, debt of INR141b, and equity of INR34b. Stage-1 of the project (Nagole to Mettuguda) was to be commissioned by March 2015 but this has been delayed. We now estimate that stage-1 would be commissioned in April 2016, followed by stage-2 (Miyapur to SR Nagar) in July 2016. Our detailed estimates of time-wise commissioning are given in the table above. We have assumed that L&T Metro would be able to monetize 18.5msf of rental space (INR40/month/sf) and that lease rentals along with advertising revenue would constitute 50-55% of total revenue, with the balance from ticketing revenue. Our key assumptions on capital costs, debt and passenger traffic are tabulated below.

Exhibit 47: L&T Metro key assumptions Particulars Unit Corridor 1 Corridor 2 Corridor 3 Total Length km 28.9 14.8 27.5 71 Capital cost per Km. INR mn / km 2,096.0 2,757.3 3,212.2 2,664.8 Total Capital cost (incl IDC) INR million 60,510 40,753 88,367 189,630 Capital cost net of grant INR million 55,510 35,753 83,867 175,130 No. of stations

27 16 23 66

Traffic-Forecast 2011 as per DPR mn/PA 307 162 142 611 Initial toll rates INR/km/PCU 15.0 15.0 15.0 Debt/Equity (incl VGFgrant) Ratio 3.1 2.8 3.5 Debt INR million 49,718 33,802 72,061 155,580 Equity INR million 10,793 6,951 16,306 34,050 Grant (Net) INR million 5,000 5,000 4,500 14,500

Source: MOSL

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Exhibit 48: Consolidated P/L for Hyderabad Metro (INR m) Consolidated P/L for the Hyderabad Metro FY17E FY18E FY19E FY20E Pasenger Volumes (Nos. m) 182 537 627 658 YoY Growth(%) 195% 17% 5% Ticket rate (INR/Passenger) 16 16 17 Ticket revenue 2,732 8,350 10,228 11,277 YoY Growth(%) 206% 22% 10% Sq ft given out on lease rentals- 18.5mn 1.9 3.7 5.6 7.4 Rental /Sq ft/year (INR) 480 528 581 639 Lease rentals from office/ITES/retail 888 1,954 3,223 4,728 Advertising revenues(4% of ridership revenues) 109 334 409 451 Total sales 3,729 10,638 13,861 16,456 YoY Growth(%)

185% 30% 19%

Lease and Advertising revenues(% of total) 27% 22% 26% 31% Regular O&M - Metro 683 2,088 2,557 2,819 Periodic Maintainence expenses 0 0 0 4,158 EBITDA 3,046 8,550 11,304 9,479 EBITDA Margin 81.7 80.4 81.6 57.6 Depreciation 3,175 5,132 5,132 5,132 Interest 10,169 16,543 15,402 14,262 PBT (10,363) (13,242) (9,373) (10,072) Tax (corporate rate) 0 0 0 0 PAT (10,363) (13,242) (9,373) (10,072)


We expect L&T Metro Rail to make a loss of INR11b in FY17 (its first year of operations). Annual losses would remain ~INR10b-11b till FY20. It would turn profitable from FY22 once lease rental and advertising revenues touch 50% of the ticketing revenue. Power Equipment JV’s – strong order flow in FY15 to drive sales and profitability over FY16-17 FY15 was a good year for the L&T-Mitsubishi Hitachi Power Systems (MHPS) JV in terms of order inflow, with orders booked for the MP Genco Shri Singajee Phase II (1,320MW) BTG, NTPC Tanda (1,320MW) boiler order, and the NTPC Khargone (1,320MW) BTG orders along with a few export orders for supply of pressure parts and pulverizers. We expect a revival in sales and margins for the JV, driven by the strong orders received in FY15. Current capacity utilization, which stands at ~50%, should improve. However, we should point out that despite 10GW of orders having been decided in 1HFY16, no orders have yet been won by LT. In FY17, we expect another 10-12GW of orders to be tendered out, with at least one UMPP order likely to be placed. L&T Mitsubishi Hitachi Power Systems Boilers Private Limited In terms of order booking, the division booked orders for the NTPC Tanda boilers (1,320MW), NTPC Khargone (1,320MW) and MP Genco Shri Singajee Stage II (1,320MW). These three orders give the business 2-3 years of strong visibility. Sales for FY15 declined 2% to INR12.3b as a result of a lower opening order book. We note a sharp improvement in gross margin to 37%; this is still low compared to the 42-44% gross margin that BHEL has reported historically. EBITDA margin expanded to 23.3% on the back of higher gross margin, partially offset by an

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INR807m provision for warranties, which offset an INR409m forex gain. The company delivered and commissioned its second unit of 700MW super critical boiler at Nabha Power and both units of the Jaypee Nigree plant in FY15. We expect another ~5GW of orders to be placed over the coming three quarters, where LT has a good chance of winning a few orders.

Exhibit 49: L&T Mitsubishi Hitachi Power Systems Boilers financials L&T MHI Boiler(51% LT) FY14 FY15 FY16E FY17E Revenues 12,549 12,286 25,347 27,327 YoY Growth (%) -47% -2% 106% 8% Gross Profit 3,456 4,599 9,488 10,229 Margin (%) 28% 37% 37% 37% Other operating expenditure (934) (1,741) (5,619) (6,058) % of sales 7% 14% 22% 22% EBITDA 2,521 2,858 3,869 4,172 Margins % 20.1% 23.3% 15.3% 15.3% Interest (641) (608) (608) (608) Depreciation (330) (437) (437) (437) PBT 1,550 1,814 2,825 3,127 Tax (549) (591) (847) (938) PAT 1,002 1,223 1,977 2,189 YoY Growth (%) -29% 22% 62% 11% Margin (%) 8.0% 10.0% 7.8% 8.0%

Source: MOSL, Company L&T Mitsubishi Hitachi Power Systems (MHPS) Turbines Private Limited In FY15, the JV commissioned the 2nd unit of 700MW of Nabha Power, both units of 600MW of Jaypee Nigri and the first unit of 800MW of APPDCL. In terms of order intake, it booked orders for the MP Genco Shri Singajee Stage II (1,320MW) and NTPC Khargone (1,320MW) TG.

Sales fell 23% to INR6.1b on account of a lower starting order book. Gross margin expanded to 38% (31% in FY14); EBITDA margin also rose to 21% on account of lower raw material costs. The management has cited various initiatives taken during the year to bring down costs, including better supply chain management and cost reduction initiatives. We build in an improvement in execution from FY16 onwards on the back of the orders won in FY15. Exhibit 50: L&T Mitsubishi Hitachi Power Systems (MHPS) Turbines Description FY14 FY15 FY16E FY17E Revenues 8,026 6,148 7,400 9,158 YoY Growth (%) -19% -23% 20% 24% Gross Profit 2,485 2,317 2,789 3,452 Margin (%) 31% 38% 38% 38% Other operating expenditure (1,095) (1,045) (1,702) (2,107) % of sales 14% 17% 23% 23% EBITDA 1,390 1,272 1,087 1,345 EBITDA Margins % 17.3% 20.7% 14.7% 14.7% Interest (1,317) (1,258) (1,258) (1,258) Depreciation (792) (1,174) (1,174) (1,174) PBT (719) (1,161) (1,346) (1,088) Tax (137) (163) 0 0 PAT (855) (1,324) (1,346) (1,088)


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L&T IT&TS – strong growth continues; listing of Infotech targeted by March 2016 and Technology Services by July 2016 L&T IT&TS saw FY15 sales grow to INR76b (+19%), with L&T Infotech at INR47.4b (+2%) and Technology Services at INR26b. PAT was INR11b (+25%). We note that in FY14, the IES business was demerged from the standalone parent entity and merged with the Product Engineering Services business (which in turn was demerged from L&T InfoTech). The merged entity, which is called L&T Technology Services, has been formed to consolidate the engineering services business under one arm to cater to the industrial, medical, telecom, transportation and process end markets. It also offers solutions in mechanical engineering services, embedded systems and product lifecycle management. It is primarily in the engineering services outsourcing space, with 98% of revenue from exports. This business will also be separately listed and the target for listing is July 2016. L&T Infotech recorded sales of INR47.4b, EBITDA of INR9.5b and PAT of INR7.7b (+25%). The management expects FY16 sales at ~USD900m (INR58b-60b) and PAT at INR9b. L&T Infotech’s business is classified into 2 clusters – Services cluster which focuses on Banking, Financial Services, Insurance, Media and Entertainment while the Industrials sector caters to manufacturing, energy and utilities. The business is focusing on increasing its presence in the Ameicas, Gulf, Europe and the far east. The search for a new CEO has also been completed with the appointment of Sanjay Jalona as the new MD and CEO of the company in August, 2015.Mr Jalona was earlier with Infosys having spent a decade in various leadership roles. The company has filed for an IPO with the exchanges and is targeting a listing in the next 2-3 quarters. As per media reports, LT is looking to raise INR20b via stake sale of 15% in the company. This is another measure being employed by the management to unlock value for its shareholders. The search for a new CEO has also been completed with the appointment of Mr Sanjay Jalona as the new MD and CEO in August 2015. Mr Jalona was earlier with Infosys, where he spent a decade in various leadership roles.

Exhibit 51: L&T Infotech revenue split by segment


Exhibit 52: L&T Infotech revenue split by geography


Industrial, 48%

Services, 52%

N. America, 67.5

Europe , 18.6

Asia Pacific, 2.5

India, 4.4 RoW, 7

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Technology services offer design and development solution across industries such as Industrial products, Medical Devices, Transportation, telecom and process industry. During FY15, the company has continued its focus on adding new clients with 27 new clients being added and of its total client base, 54 clients are Fortune 500 companies. During FY15, TS entered into a JV with Thales for high end avionic software for the defense space and also acquired Dell Engineering to expand its footprint in North America. Exhibit 53: L&T IT&TS Financials Infotech and Technology services FY14 FY15 FY16E FY17E Sales 63,537 77,373 88,690 101,810 YoY Growth (%) 27 22 15 15 EBITDA 14,590 14,560 17,295 19,875 Margin % 23.0 18.8 19.5 19.5 Depreciation (683) (1,376) (906) (951) Other Income (811) 1,137 887 887 EBIT 13,096 14,321 17,276 19,811 Interest cost 298 135 104 104 PBT 12,798 14,186 17,172 19,707 Tax (4,201) (3,065) (3,249) (3,785) Rate (%) 33 22 19 19 PAT 8,597 11,121 13,923 15,921 YoY Growth (%) 49 29 25 14


Financial Services – reasonable show in a constrained environment LT’s Financial Services business primarily operates in retail and corporate finance, housing finance, infrastructure finance, investment and wealth management – all housed under L&T Finance Holdings. The general insurance business is housed under L&T General Insurance, which a 100% subsidiary of LT. The exhibit below highlights the key areas of operations for L&T Finance Holdings.

Exhibit 54: L&T Finance Holdings group structure


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In FY15, loans and advances grew 18% to INR472b, driven primarily by focus on B2C and operational projects in wholesale finance. The proportion of B2C has now grown to 57%, with B2B (wholesale finance) having come down to 43%. NIM has improved by 20bp to 5.7% due to the increased focus on retail finance. PAT for FY15 was INR7.3b (+23%) reflecting better profitability and asset quality. Exhibit 55: Composition of loan book shifting towards B2C business (retail finance)


We model a strong 15% growth in loans and advances over the next two years, which would drive 17% CAGR in earnings over the same period. LT’s stake in Finance Holdings has declined to 64% after it recently sold 5% stake to Bain Capital. Bain Capital is separately also buying another 5% stake in L&T Finance Holdings via preferential allotment of equity shares and warrants. As per our discussion with the management, LT would look to bring down its stake in Finance Holdings to unlock value. L&T General Insurance In its fourth year of business, the general insurance business achieved INR3.4b of gross premiums and INR2b of net premiums. . In terms of end market, motor insurance is the highest with 60% share while health and other commercial lines of business contributed 14% and 26% of the total GWP. PAT loss in FY15 was INR0.94b v/s INR1b in FY14. Exhibit 56: L&T Financial Services P/L for FY15-17E (including General Insurance) Finance Subs and Associate total FY15 FY16E FY17E

Sales 64,023 74,331 85,367

YoY growth 22% 16% 15%

EBITDA 8,822 10,746 12,589

Margins (%) 14% 14% 15%

Depreciation (955) (1,838) (1,883)

OI 1,412 2,125 2,125

EBIT 9,279 11,032 12,831

EBIT margin 14% 15% 15%

PAT 6,165 7,664 8,982


24%

81% 79% 67% 54% 43%

76%

19% 21% 33% 46% 57%

FY10 FY11 FY12 FY13 FY14 FY15

B2C B2B

69.8 101.5 146.5 184.7 224.8 249.9

INR b

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Well positioned to benefit from economic recovery Maintain Buy LT is exposed to several levers across business/geographic segments and has

emerged as the E&C partner of choice in India, which provides a robust foundation to capitalize on the next leg of the investment cycle.

Management intent is to improve consolidated RoE to 20% (11.2% in FY15) and RoCE to 15% (8% in FY13) in the medium term. Capping investments in concession business / asset monetization are important parts of this strategy.

Manufacturing businesses (like Shipyard, Power BTG, Forgings, etc) also present interesting possibilities in the longer term. Many of these businesses are difficult to replicate and LT is strongly positioned as a dominant player.

We model consolidated EPS at INR51.1 in FY16 (up 8%) and INR65 in FY17 (up 27%). We maintain Buy with an SOTP-based price target of INR2,000.

Exhibit 57: L&T: Sum of the parts value

Method Valuation multiple

Value (INR b)

Value (INR/sh) Rationale

Construction Business

L&T Standalone FY17E PER (x) 25.0 1,290 1,379 At average multiple during FY07-11, when domestic

ordering was robust

L&T Hydrocarbons FY17E EV/Sales(x) 0.5 42 45 International Ventures (L&T FZE) FY17E PBV (x) 3.0 34 37 Service Segments

Infotech / Technology FY17E PER (x) 15.0 239 255 At par to mid tier IT companies

Finance Sevices incl. general insurance FY17E PBV (x) 2.0 161 110 At discount to peer group given relatively lower ratios

Sapura Shipping FY17E PBV (x) 1.5 1 2 L&T Realty FY17E PER (x) 20.0 70 75 Asset Ownership / Project Developer

Infrastructure Development Projects FY17E PBV (x) 1.0 81 86 At Book Value to capture the macro volatility Power Development Projects FY17E PBV (x) 1.0 27 29 At Book Value, given Case 2 bid

Manufacturing Ventures Power Equipments FY17E PER (x) 25.0 35 38 Expect ind. project awards to sustain at 15-18GW pa

Shipbuilding / Container Port FY17E PBV (x) 3.0 53 56 Increased possibility of Defence (Naval) orders

Special Steel and Heavy Forgings FY17E PBV (x) 3.0 25 26 Possibility of Nuclear project awards to begin in FY16

Less: Holding Company disc of 20%

-136 Total

2,000

Source: MOSL

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Operating Matrix

Exhibit 58: Operating matrix (INR m) FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Consolidated E&C Business Order Intake 639 736 689 815 1,020 1,227 1,340 1,475 - Domestic 610 669 536 670 628 943 1,084 1,214 - Overseas 29 67 153 145 383 284 256 260 Order Intake, % YoY 15.2% -6.4% 18.3% 24.1% 21.4% 9.2% 10.0% - Domestic 9.7% -19.9% 25.0% -6.2% 50.2% 14.9% 12.0% - Overseas 128.6% 128.1% -5.0% 163.7% -25.8% -9.9% 1.7% Revenues 318 377 465 597 624 619 720 848 - Domestic 262 340 419 467 471 457 501 577 - Overseas 56 37 46 130 153 162 219 272 Revenues, % YoY 18.3% 23.4% 28.6% 7.4% -0.8% 16.3% 17.8% - Domestic 29.7% 23.1% 11.4% 4.2% -3.0% 9.7% 15.0% - Overseas -35.1% 26.0% 184.3% 19.0% 6.0% 35.0% 24.2% Analyzing Domestic Intake 610 669 536 670 628 943 1,084 1,214 Large Projects (INR15b+) 286 143 145 67 411 500 600 Base Orders (sub INR15b) 383 393 525 561 532 584 614

Consolidated Order Intake 842 1,029 1,272 1,554 1,687 1,940 % YoY 22.20% 23.60% 22% 9% 15% Consolidated Revenues 642 745 851 920 1,046 1,216 % YoY 15.80% 14.20% 8.00% 13.70% 16.20%

EBIDTA Margins E&C, Consolidated 13.60% 13.70% 13.10% 11.90% 12.00% 8.40% 9.20% 10.10% E&C, Standalone 13.60% 12.20% 11.30% 12.20% 13.20% 11.60% 11.00% 11.00%

Standalone EPS* 34.3 37.2 44.9 38.3 43.7 41.1 44.4 55.2 Consolidated EPS 41.1 46.4 49.1 51.8 49.3 47.2 51.1 65 Consolidated EPS composition (INR per share) Infotech 3.7 3.5 4.7 6.2 6.9 11.9 14.9 17 Finance 3.1 3.8 4.7 5.8 4 4.9 5.2 6.1 Manufacturing 0.4 0.8 -1.1 -3 -7.2 -6.5 -6 -5.4 Developmental Business 3.9 0.2 -2.9 -2.9 -4.5 4.8 -6.8 -14.2 E&C / Electrical Products, etc 30.1 38.2 43.9 45.6 50 32.1 43.7 61.4 ROE (%) [Standalone] 17.4 18.9 16.8 14.2 15.6 13.3 13 14.2 ROE (%) [Consolidated] 21.8 18.4 17 15.3 12.8 11.2 11.2 13.1 Working Capital (% of sales) - Adj for Subs Adv. 3.2 17.7 17 26.5 25.5 25.5 22.7 22.7


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Exhibit 59: Quarterly Performance (Standalone)

(INR Million)

Y/E March FY15 FY16E FY15 FY16E

1Q 2Q 3Q 4Q 1Q 2QE 3QE 4QE

Net Sales 103,376 127,168 149,950 189,679 107,102 139,885 170,000 230,307 570,174 647,293 Change (%) 5.2 3.3 4.2 -5.5 3.6 10.0 13.4 21.4 0.7 13.5 EBITDA 10,873 13,412 15,694 24,899 9,746 14,685 17,700 26,948 64,879 69,079 Change (%) 21.9 13.1 -6.3 -14.2 -10.4 9.5 12.8 8.2 -2.7 6.5 Margin (%) 10.5 10.5 10.5 13.1 9.1 10.5 10.4 11.7 11.4 10.7 Depreciation 2,609 2,376 2,638 2,458 2,463 2,450 2,550 3,003 10,082 10,467 Interest 2,719 3,126 5,004 3,341 2,872 3,150 3,500 3,990 -14,190 13,512 Other Income 4,880 6,033 6,219 5,701 5,535 5,600 5,600 6,826 22,834 23,561 Extraordinary Inc/(Exp) 1,714 0 0 1,857 0 0 0 0 0 0 Reported PBT 10,425 13,943 14,271 24,801 9,946 14,685 17,250 26,781 63,441 68,661 Tax 3,204 3,522 3,673 6,052 2,936 3,400 4,500 6,968 16,450 17,804 Effective Tax Rate (%) 30.7 25.3 25.7 24.4 29.5 23.2 26.1 26.0 25.9 25.9 Reported PAT 8,936 10,422 10,598 20,607 7,010 11,285 12,750 19,813 46,991 50,857 Adjusted PAT 7,221 10,422 10,598 18,749 7,010 11,285 12,750 19,813 46,991 50,857 Change (%) 8.7 20.5 -6.7 -16.3 -2.9 8.3 20.3 5.7 -4.2 8.2 E: MOSL Estimates

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Financials and valuations

Income Statement

Y/E March 2012 2013 2014 2015 2016E 2017E Sales and Services 648,777 751,953 858,890 927,617 1,054,959 1,225,685

Operating other Income

Total Revenues 648,777 751,953 858,890 927,617 1,054,959 1,225,685

Growth Rate (%) 31.1 15.9 14.2 8.0 13.7 16.2

Excise Duty 6,470 6,973 7,606 7,571 8,540 9,923

Net Revenues 642,307 744,980 851,284 920,046 1,046,418 1,215,762

Growth Rate (%) 31.0 16.0 14.3 8.1 13.7 16.2

Manufacturing Expenses 472,185 546,888 616,948 672,937 770,374 880,063

Staff Cost 49,950 62,446 80,276 79,222 88,213 102,489

S G &A Expenses 33,577 36,359 46,517 54,531 62,021 72,058

EBITDA 86,885 99,287 107,543 113,356 125,810 161,153

Change (%) 83.6 14.3 8.3 5.4 11.0 28.1

Adj EBIDTA 86,885 99,287 107,543 113,356 125,810 161,153

EBITDA Margin (%) 13.5 13.3 12.6 12.3 12.0 13.3

Depreciation 15,803 16,371 14,458 26,225 24,939 31,148

EBIT 71,082 82,917 93,085 87,131 100,871 130,004

Net Interest 11,019 21,243 31,414 28,507 33,521 40,771

Other Income 8,290 10,557 9,819 10,072 10,260 13,424

Profit before Tax 68,353 72,231 71,490 68,696 77,610 102,657

Tax 22,826 23,790 26,076 22,836 27,940 39,010

Effective Tax Rate (%) 33.4 32.9 36.5 33.2 36.0 38.0

Reported Profit 46,095 51,808 48,817 49,337 49,670 63,647

EO Adjustments 568 3,368 3,402 3,477 0 0

Adjusted Profit 45,555 47,973 45,680 44,171 47,781 60,807

Growth (%) 269.4 5.3 -4.8 -3.3 8.2 27.3

Cons. Profit (Reported) 46,123 51,341 49,083 47,648 47,781 60,807

E: MOSL Estimates

Balance Sheet

Y/E March 2012 2013 2014 2015 2016E 2017E Equity Capital 1,225 1,231 1,854 1,859 1,859 1,859 Reserves and Surplus 287,811 337,366 375,262 407,232 440,779 484,368 Net Worth 289,036 338,597 377,116 409,091 442,638 486,227 Debt 471,501 619,936 801,529 905,714 1,030,665 1,070,984 Deferred Tax Liability 44,995 1,837 3,375 -1,847 -1,847 -1,847 Minority Interest 17,535 26,529 31,792 49,986 51,897 54,759 Capital Employed 827,898 986,899 1,213,812 1,362,944 1,523,353 1,610,124 Gross Fixed Assets 255,174 379,822 411,347 454,711 534,711 614,711 Less : Depreciation 61,380 75,670 88,824 107,331 132,270 163,418 Add : Capital WIP 149,127 113,068 143,237 155,237 155,237 155,237 Net Fixed Assets 342,921 417,220 465,760 502,618 557,678 606,530 Investments 87,895 87,675 81,090 96,121 96,121 96,121 Inventory 42,299 51,874 55,275 65,182 74,135 86,132 Sundry Debtors 204,054 230,149 263,846 300,894 342,223 364,297 Cash & Bank 35,221 35,715 40,966 57,562 109,680 128,939 Loans & Advances 74,922 84,536 134,755 193,020 219,532 255,059 Other Current Assets 153,396 201,930 254,934 246,883 280,793 326,235 Current Assets 757,623 924,213 1,150,574 1,335,860 1,519,728 1,662,866 Current Liabilities 360,755 442,209 483,612 571,655 650,174 755,393 Net Current Assets 396,869 482,004 666,962 764,206 869,554 907,473 Capital Deployed 827,684 986,899 1,213,812 1,362,944 1,523,354 1,610,124 E: MOSL Estimates

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Financials and valuations

Ratios Y/E March 2012 2013 2014 2015 2016E 2017E Basic (INR)

Standalone EPS Adj 47.5 49.3 52.9 50.2 54.4 66.2 Growth (%) 22.1 3.7 7.4 -5.1 8.2 21.7

Consolidated EPS Adj 49.1 51.8 49.3 47.2 51.1 65.0 Growth (%) 269.4 5.3 -4.8 -4.2 8.2 27.3 Con. EPS (Fully Diluted) 49.1 51.8 49.3 47.2 51.1 65.0 Growth (%) 269.4 5.3 42.8 -4.2 8.2 27.3 Cash EPS 66.2 69.4 64.9 75.2 77.7 98.3 Book Value 311.8 365.3 406.9 437.3 473.2 519.7 Dividend Per Share 11.1 11.5 14.2 13.0 13.0 15.9 Div. Payout (Incl. Div Tax ) % 22.5 22.2 28.9 27.5 25.5 24.4 Valuation (x)

P/E (Standalone) 24.4 23.5 21.9 23.0 21.3 14.0 P/E (Consolidated) 31.5 29.9 31.5 32.8 30.3 23.8 P/E (Consolidated) (Fully Diluted) 31.5 29.9 31.5 32.8 30.3 23.8 Price / CEPS 23.4 22.3 23.9 20.6 19.9 15.8 EV/EBITDA 21.6 20.4 20.4 20.3 18.8 14.8 EV/ Sales 3.5 2.9 2.7 2.6 2.5 2.3 Price / Book Value 5.8 5.0 4.2 3.8 3.5 3.3 Dividend Yield 0.7 0.7 0.9 0.8 0.8 1.0 Return Ratio (%)

RoE 17.0 15.3 12.8 11.2 11.2 13.1 RoCE 8.8 8.3 7.2 6.5 6.3 7.3 Turnover Ratios

Debtors (Days) 116.0 112.8 113.1 119.4 119.4 109.4 Inventory (Days) 24.0 25.4 23.7 25.9 25.9 25.9 Asset Turnover (x) 0.8 0.8 0.7 0.7 0.7 0.8 Leverage Ratio

Current Ratio (x) 2.1 2.1 2.4 2.3 2.3 2.2 D/E (x) 0.9 1.0 1.2 1.2 1.3 1.3 E: MOSt Estimates

Cash Flow Statement Y/E March 2012 2013 2014 2015 2016E 2017E PBT before EO Items 46,123 52,057 49,020 47,648 47,781 60,807 Add : Depreciation 15,803 16,371 14,458 26,225 24,939 31,148 Change in diff tax liability -3,231 -43,158 1,538 -5,221 0 0 (Inc)/Dec in WC -134,620 -84,641 -179,708 -80,647 -53,231 -18,660 CF from Operations -75,925 -59,372 -114,692 -11,995 19,490 73,295 (Inc)/Dec in FA -77,087 -90,670 -62,998 -63,083 -80,000 -80,000 Free Cash Flow -153,012 -150,042 -177,690 -75,078 -60,510 -6,705 (Pur)/Sale of Investments 4,263 220 6,585 -15,032 0 0 CF from Investments -73,037 -90,237 -56,413 -78,114 -80,000 -80,000 (Inc)/Dec in Net Worth 9,155 5,057 4,822 -1,570 0 0 (Inc)/Dec in Debt 143,215 148,436 181,593 104,185 124,951 40,319 Change in Minority Interest 7,275 8,994 5,263 18,194 1,911 2,862 Dividend Paid -11,916 -12,385 -15,322 -14,103 -14,186 -17,265 CF from Fin. Activity 147,729 150,102 176,355 106,705 112,676 25,916 Inc/Dec of Cash -1,233 493 5,251 16,596 52,166 19,211 Add: Beginning Balance 36,455 35,222 35,715 40,966 57,562 109,728 Closing Balance 35,222 35,715 40,966 57,562 109,728 128,939 E: MOSL Estimates

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Capital Goods Report Gallery

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21 October 2015 39

N O T E S

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21 October 2015 40

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