Larsen & Toubro - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and 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 this report. Investors should consider this report as only a single factor in making their investment decision.

20 March 2017 Asia Pacific/India Equity Research

Electrical Equipment

Larsen & Toubro (LART.BO / LT IN) Rating OUTPERFORM Price (17-Mar-17, Rs) 1,551 Target price (Rs) (from 1,800) 1,850 Upside/downside (%) 19.3 Mkt cap (Rs/US$ mn) 1,446,750 / 22,118 Enterprise value (Rs mn) 2,303,684 Number of shares (mn) 932.97 Free float (%) 88.2 52-wk price range (Rs) 1,601-1,182 ADTO-6M (US$ mn) 34.2 Target price is for 12 months.

Research Analysts

Lokesh Garg

91 22 6777 3743

[email protected]

Vaibhav Jain

91 22 6777 3968

[email protected]

COMMENT

Domestic execution conundrum; turning better ■ 100 projects; half the backlog; incrementally turning better. We take a

deep dive at about 100 domestic projects (~1/2 of total domestic backlog) to

understand the execution scenario. The execution scenario is prima-facie

better in segments such as roads (more projects have started, e.g., MP

projects), power (Malwa project has momentum now) and DFCC (execution

picking up; some half complete). T&D, Metro and hydrocarbons remain

strong. Water and real estate (half is residential) remain mixed with contract

specific developments.

■ Overseas execution, inflows steady; several strong niches. L&T

execution and inflows from the Middle East have remained steady. Overall

market ordering reduced to US$100 bn p.a. vs. ~US$160 bn at CY14 peak.

We estimate 4-4.5% market share for L&T supported by specific niches such

as (1) gas compression orders from PDO Oman, (2) T&D orders from Qatar,

(3) budding relationship with Saudi Aramco, and (4) fabrication presence

(Sohar Oman yard). Dubai Expo and Qatar world cup are bringing in

opportunities.

■ Guidance inconsequential; strong earnings compounding ahead. Near-

term guidance is inconsequential, as we (probably the market also) already

build in a substantial miss. We build in strong earnings growth of 25% over

FY16-19E based on (1) EPC revenue growth (11% CAGR), (2) margin

normalisation (150 bp+ in EPC) largely on Hydrocarbons and HE, (3) a 15%

CAGR growth in services and (4) lower interest cost and flat depreciation.

■ Reiterate OUTPERFORM; increase TP to Rs1,850 (from Rs1,800). Our TP

of Rs1,850 is based on Rs1,380 for the core EPC business (20x P/E on

Mar’19E EPS) and Rs480 for the subs. Our OUTPERFORM rating is based

on domestic execution pick-up, a steady Middle East, reducing working

capital and reasonable valuations (18x FY19E consol. and 16.5x FY19E

EPC EPS of Rs70). The key risk is margin erosion on delays. Absence of

investment cycle could cap upside.

Share price performance

The price relative chart measures performance against the

S&P BSE SENSEX IDX which closed at 29,513.39 on

17/03/17. On 17/03/17 the spot exchange rate was

Rs65.41/US$1

Performance 1M 3M 12M Absolute (%) 4.8 14.1 29.9 Relative (%) -0.5 2.2 9.7

Financial and valuation metrics

Year 3/16A 3/17E 3/18E 3/19E Revenue (Rs mn) 1,019,641.2 1,097,515.2 1,225,918.9 1,383,957.3 EBITDA (Rs mn) 103,494.0 112,197.7 134,539.1 158,498.3 EBIT (Rs mn) 85,626.7 93,749.7 116,349.4 140,171.7 Net profit (Rs mn) 41,848.4 52,920.1 67,106.9 80,369.6 EPS (CS adj.) (Rs) 44.89 56.77 71.99 86.22 Change from previous EPS (%) n.a. 0.0 0.0 0.0 Consensus EPS (Rs) n.a. 57.27 69.05 82.41 EPS growth (%) (5.5) 26.5 26.8 19.8 P/E (x) 34.5 27.3 21.5 18.0 Dividend yield (%) 1.2 1.1 1.4 1.7 EV/EBITDA (x) 22.0 20.5 17.5 15.0 P/B (x) 3.25 2.66 2.29 1.96 ROE (%) 9.8 10.7 11.4 11.7 Net debt/equity (%) 175.6 150.5 138.2 122.3

Source: Company data, Thomson Reuters, Credit Suisse estimates

20 March 2017

Larsen & Toubro (LART.BO / LT IN) 2

Larsen & Toubro (LART.BO / LT IN)

Price (17 Mar 2017): Rs1,551; Rating: OUTPERFORM; Target Price: (from Rs1,800) Rs1,850; Analyst: Lokesh Garg

Income Statement (Rs mn) 03/16A 03/17E 03/18E 03/19E

Sales revenue 1,019,641 1,097,515 1,225,919 1,383,957 Cost of goods sold 724,126 778,798 862,630 968,607 EBITDA 103,494 112,198 134,539 158,498 EBIT 85,627 93,750 116,349 140,172 Net interest expense/(inc.) 16,405 14,799 11,936 11,132 Recurring PBT 79,254 90,780 116,355 141,608 Profit after tax 54,946 62,184 79,703 97,002 Reported net profit 42,791 52,920 67,107 80,370 Net profit (Credit Suisse) 41,848 52,920 67,107 80,370

Balance Sheet (Rs mn) 03/16A 03/17E 03/18E 03/19E

Cash & cash equivalents 53,283 32,325 44,815 79,082 Current receivables 260,292 280,171 312,950 353,294 Inventories 48,296 50,796 53,296 55,796 Other current assets 1,138,140 1,307,393 1,526,683 1,791,663 Current assets 1,500,011 1,670,685 1,937,744 2,279,834 Property, plant & equip. 295,362 253,107 248,268 241,319 Investments 104,709 117,315 117,315 117,315 Intangibles 0 0 0 0 Other non-current assets 0 25 25 25 Total assets 1,900,081 2,041,133 2,303,352 2,638,493 Current liabilities 540,943 580,902 692,285 857,184 Total liabilities 1,428,428 1,471,056 1,645,806 1,872,789 Shareholders' equity 444,546 542,969 630,439 738,597 Minority interests 27,107 27,107 27,107 27,107 Total liabilities & equity 1,900,081 2,041,133 2,303,352 2,638,493

Cash Flow (Rs mn) 03/16A 03/17E 03/18E 03/19E

EBIT 85,627 93,750 116,349 140,172 Net interest (6,373) (2,970) 5 1,437 Tax paid (24,308) (28,596) (36,652) (44,607) Working capital (199,141) (151,674) (143,186) (142,924) Other cash & non-cash items 17,867 18,448 18,190 18,327 Operating cash flow (126,328) (71,041) (45,293) (27,596) Capex (58,306) (14,622) (19,490) (17,879) Free cash flow to the firm (184,635) (85,664) (64,783) (45,475) Investing cash flow (66,894) (27,229) (19,490) (17,879) Equity raised 5 0 0 0 Dividends paid (18,410) (16,974) (22,010) (26,721) Financing cash flow (34,787) (14,330) 41,357 35,363 Total cash flow (228,010) (112,600) (23,426) (10,112) Adjustments 0 0 0 0 Net change in cash (228,010) (112,600) (23,426) (10,112)

Per share 03/16A 03/17E 03/18E 03/19E

Shares (wtd avg.) (mn) 932 932 932 932 EPS (Credit Suisse) (Rs) 44.89 56.77 71.99 86.22 DPS (Rs) 18.50 17.42 22.15 26.61 Operating CFPS (Rs) (135.52) (76.21) (48.59) (29.60)

Earnings 03/16A 03/17E 03/18E 03/19E

Growth (%) Sales revenue 10.8 7.6 11.7 12.9 EBIT (1.9) 9.5 24.1 20.5 EPS (5.5) 26.5 26.8 19.8 Margins (%) EBITDA 10.2 10.2 11.0 11.5 EBIT 8.4 8.5 9.5 10.1

Valuation (x) 03/16A 03/17E 03/18E 03/19E

P/E 34.5 27.3 21.5 18.0 P/B 3.25 2.66 2.29 1.96 Dividend yield (%) 1.2 1.1 1.4 1.7 EV/sales 2.2 2.1 1.9 1.7 EV/EBITDA 22.0 20.5 17.5 15.0 EV/EBIT 26.6 24.6 20.2 17.0

ROE analysis (%) 03/16A 03/17E 03/18E 03/19E

ROE 9.8 10.7 11.4 11.7 ROIC 4.6 4.7 5.3 5.9

Credit ratios 03/16A 03/17E 03/18E 03/19E

Net debt/equity (%) 175.6 150.5 138.2 122.3 Net debt/EBITDA (x) 8.00 7.65 6.75 5.91

Company Background

L&T is India's largest engineering & construction company with presence in the infrastructure, hydrocarbons, metals, shipbuilding and defence segments. L&T is a significant player in financial services, IT services and infrastructure asset development.

Blue/Grey Sky Scenario

Our Blue Sky Scenario (Rs) 2,100

Our Grey Sky Scenario (Rs) 1,500

Share price performance

The price relative chart measures performance against the S&P BSE SENSEX

IDX which closed at 29,513.39 on 17-Mar-2017

On 17-Mar-2017 the spot exchange rate was Rs65.41/US$1

Source: Company data, Thomson Reuters, Credit Suisse estimates

20 March 2017


Focus charts and tables

Figure 1: Quick review of domestic execution—roads, residential real estate and water need watching

Sector Delta Backlog (Rs bn) Remarks

Roads Positive 220 A larger proportion of contracts have now started vs. earlier. A few contracts still stuck.

Power Positive 120 Malwa contract (Rs55 bn) now moving fast. Steady progress on others.

Railways Positive 200 Primarily DFCC. Progress picking up; some projects half complete.

Real estate Same 350 Commercial and industrial execution up. Residential still slow. Mix turning less residential.

Power T&D Same 150 Steady progress on both central and state contracts including rural electrification ones.

Water Same 200 Reasonable progress (Rajasthan, Odisha, MP, UP) except some contracts (Telangana, etc.)

Metros Positive 100 Very strong progress across cities even in relatively new contracts.

Hydrocarbons Same 100 Reasonable progress across contracts from ONGC, etc.

Source: Company data, Credit Suisse estimates

Figure 2: Est. mix of domestic book (Rs1,850 bn) Figure 3: Road—Larger proportion have now started

Source: Company data, Credit Suisse estimates Source: Company data, CEA, Credit Suisse research

Figure 4: DFCC picking up momentum now Figure 5: Power—Key projects started (e.g., Singaji)

Source: Company data, Credit Suisse estimates Source: Company, CS estimates

Figure 6: Guidance—We build in a significant miss Figure 7: 25% EPS CAGR during FY16-19E

Source: Company data, Credit Suisse estimates Source: Company, CS estimates

Roads, 220

Railways, 200

Power T&D, 150

Thermal generation,

120Water, 200

Real estate (resi), 175

Real estate (non-resi),

175

Metros, 100

O&G capex, 100

Defense, 100

Progressing well35%

Work started44%

To be cancelled

8%

No progress13%

Status of road projects

-

20

40

60

80

100

120

140

2013A 2014A 2015A 2016A 2017RE 2018BE

Investment in DFCC (Rs bn)

-

5,000

10,000

15,000

Khargone Shree Singaji Tanda

Capex in FY15 (Rs mn) FY16 9M17

25.9 23.4

12.8

5.2

10.0 10.6

-

5.0

10.0

15.0

20.0

25.0

30.0

Total inflow gth. Sales growth EPC EBIT margin

4Q17E-LT guidance 4Q17E-CS estimate(% )

24

15

11

- 5 10 15 20 25 30

PAT

EBITDA

Revenue

FY16-19E CAGR (%)

20 March 2017


Domestic execution seems slightly better

Domestic execution has been disappointing for a long while curtailing the revenue and

earnings growth for the company. We highlight that domestic execution is appearing better

with a pick-up in execution across roads, railways and power verticals. We estimate L&T’s

domestic order backlog mix and present our perspective on a sectoral basis.

We take a deep dive and take a look at about 100 domestic projects which would account

for about half of total domestic backlog to understand the domestic execution scenario.

We highlight that the execution scenario is prima-facie turning better in segments such as

roads (more projects have started such as MP projects), power (Malwa project has

momentum now) and DFCC (execution picking up; some half complete). Segments such

as T&D, Metro and hydrocarbons are very strong in execution terms. Segments such as

water and real estate (particularly residential) remain a mixed bag with contract-specific

developments.

Figure 8: Domestic backlog for L&T (Rs1,833 bn) Figure 9: We expect execution to improve gradually

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Absence of private sector orders has possibly slowed execution

Figure 10: Public sector share in inflows has risen Figure 11: Execution always skewed towards 4Q


Real estate (resi &

commercial), 350

Industrial, other infra

projects, 159

Railways, 200

Roads, 220Water, 200

Power T&D, 150

Thermal generation,

120

Metros, 100

O&G capex, 100

Defense, 100

34.6

30.1

27.8 28.6

30.3

31.6

26.0

28.0

30.0

32.0

34.0

36.0

-

500

1,000

1,500

2,000

2,500

FY14 FY15 FY16 FY17E FY18E FY19E

Domestic EPC order backlog EPC revenues

Book to bill ratio (%, RHS)

(Rs bn)

41 39 38

26 32 35

58

71 72

81

-

20

40

60

80

100

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

FY

17T

D

Public sector inflows as % of total

-

5

10

15

20

25

30

35

40

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Domestic execution trend as % of FY

20 March 2017


Domestic execution improvement can drive significant operating leverage

Improved domestic execution is one of the key catalysts for the stock. The company’s

business has scope for significant operating leverage both above and below the EBITDA

line. Operating leverage originates from absorption of fixed overhead costs, flat

depreciation and interest costs.

Figure 12: Status of domestic backlog

Sector Delta Backlog (Rs bn) Remarks

Roads Positive 220 A larger proportion of contracts have now started vs. earlier. A few contracts still stuck.

Power Positive 120 Malwa contract (Rs55 bn) now moving fast. Steady progress on others.

Railways Positive 200 Primarily DFCC. Progress picking up; some projects half complete.

Real estate Same 350 Commercial and industrial execution up. Residential still slow. Mix turning less residential.

Power T&D Same 150 Steady progress on both central and state contracts including rural electrification ones.

Water Same 200 Reasonable progress (Rajasthan, Odisha, MP, UP) except some contracts (Telangana, etc.)

Metros Positive 100 Very strong progress across cities even in relatively new contracts.

Hydrocarbons Same 100 Reasonable progress across contracts from ONGC etc.


Roads still a mixed bag; though better than before

Roads execution for L&T as well as for the broader sector has been disappointing for a

long while. However, while still being mixed, we highlight improvement in the portfolio with

several projects starting execution. We note progress on several large contracts now such

as (1) Hospet-Chitradurga of Tata Realty, (2) MP road projects (Rewa-Jabalpur-

Lakhnandon), (3) Gulbarga-Homnabad, and (4) Mandovi river bridge. Work has recently

started (though marginal as yet) on (1) Villukuri-Kanyakumari, and (2) Raipur-Bilaspur

projects. However, work has not started on (1) Addahole-Bantwal, (2) Mukkola-TN border

projects. Solapur-Bijapur project of Uniquest Infra also has had no progress and is likely to

be cancelled.

Figure 13: Roads status

Date Customer Order size

(Rs bn)

Nature of Work Current status

Apr-15 NHAI 26.5 Rewa-Katni-Jabalpur, Jabalpur Lakhnadon

projects, MP

Work started in April 2016 - Ongoing now; ~15% complete

Mar-15 PWD, Delhi 16.6 Barapullah Elevated Corridor Phase-III Work slow due to land acquisition delays

Oct-14 UP govt. 16.3 Lucknow to Unnao expressway (63km) Work completed

Apr-15 Tata Realty & Infra 12.0 Hospet Chitradurge road ~22% complete (Jan-17); Slow progress - Utilities shifting work

ongoing

Jun-15 Uniquest Infra 11.0 Solapur-Bijapur road Seems project is being rebid.

Mar-16 NHAI 10.8 Kerala/Tamil Nadu –Villikuri -Kanyakumari road Project is in two parts. Has started but with only 0.8 and 3.6%

completion in two stretches, respectively. NGT order delay

Jan-15 NHAI 10.0 Bijapur-Gulbarga-Homnabad road Shifting of utilities completed in 2QFY17; almost half complete

Apr-16 NHAI 8.2 Addahole (Gundya) to Bantwal, KN road No progress as per NHAI; Work should have started in Dec-16 as

per KN assembly discussion

Apr-16 NHAI 5.0 Mukkola junction to Kerala/Tamil Nadu road No progress until Jan-17

Jul-14 GSIDC (Goa) 4.0 Bridge across Mandovi river Work restarted and likely to be completed by Sep-17

Nov-15 NHAI 3.9 Chandigarh-Kharar elevated corridor Work started in Dec 2016 after local issues were addressed; 10%

complete with target date pushed to Apr-19 (v/s Dec-18)

Jan-16 NHAI 3.9 Raipur to Bilaspur road Marginal completion of 0.8% as of Jan-17

May-14 Kolkata MDA 3.1 Garden Reach to Remount Road elevated corridor Likely to be completed by end March


20 March 2017


Power: Some of the long stuck projects have picked momentum

We highlight that several projects such as Tanda and Shree Singaji (Malwa) have now

started execution vs. being slow so far, particularly the Malwa project. The Khargone

project has remained steady with FY17 execution (~Rs10 bn) likely similar to FY16

execution. Pick-up in Malwa project is most important and impressive as it is a very large

project (Rs55 bn) that has now started strong execution in FY17, with FY17 spend likely to

be more than treble of FY16 spend in the project.

Figure 14: Malwa project pick up most impressive; Tanda, Khargone on track

Date Client Order size

(Rs bn)


Mar-15 NTPC 55.8 1320MW Khargone - EPC Slightly slow ~Rs10 bn execution (flat YoY) in FY17

Sep-14 MP Genco. 51.0 1320MW Shree Singaji (II) - EPC Work picked up in FY17 - 9M capex 2X FY16 capex

Aug-16 Neyveli UP

Power (JV)

19.7 1980MW Ghatampur - EPC New project. Land acquisition, clearances done; FC

pending

Sep-14 NTPC 18.9 1320MW Tanda (II) - TG set Steady progress in execution (Rs9 bn capex in 9M)


Figure 15: Malwas FY17 capex >3X of FY16; Tanda about 2X; Khargone flat


DFCC – picking pace; massive contribution to total book

L&T has a total exposure of ~Rs200 bn to DFCC and related projects. DFCC execution

has picked up meaningfully. Some large projects such as Rewari-Iqbalgarh track (about

US$1 bn; Rs67 bn project size) are about half complete. DFCC intends to complete this

section earlier to start at least a portion of the DFCC project.

Figure 16: DFCC spending—up manifold; but still small relative to project size


-

2,000

4,000

6,000

8,000

10,000

12,000

Khargone Shree Singaji Tanda

Capex in FY15 (Rs mn) FY16 9M17

-

50

100

150

2013A 2014A 2015A 2016A 2017RE 2018BE

Investment in DFCC (Rs bn)

20 March 2017


Figure 17: Work underway on most stretches

Date Nature of Work Order size# (Rs bn) Status (Jan-2017)

Jun-13 Rewari-Iqbalgarh track work (626kms) 67.0 ~43% complete

Mar-16 Iqbalgarh-Vadodara track work (290kms) 47.4 ~5% complete

Oct-16 Rewari-Dadri (Civil, Elect and S&T) 38.0 Civil works underway

Nov-14 Rewari-Vadodara - Electrification (915kms) 27.0 Civil works underway;

electrification work to pick

pace in some time

Jan-16 Vadodara-JNPT - Electrification (422kms) 12.1

Jun-15 Special steel bridges over JNPT-Vadodara and Rewari-Dadri 10.2 ~15% complete

Jun-16 Mughalsarai to New Bhaupur - Electrification (417kms) 8.5 ~5% complete

May-13 Design and construction of 2x25 kV electrification, signaling,

telecommunication and associated works

3.2

Total 213.4

# - All contract amounts are for the JV entities (L&T has bid for contracts via JVs). Source: Company data, Credit Suisse estimates

Real estate: residential about half; being marquee may support

Real estate has a broader mix in terms of institutional, commercial and residential projects.

Residential is about 50% of total real estate EPC business of Rs150 bn p.a. and is about

half of backlog of Rs350 bn or so.

Residential projects are at the center of concern on execution speed related to end-

demand environment. Based on a sample of projects below we highlight that residential is

about 50% of L&T’s total business in real estate.

Residential supported by marquee nature

Residential real estate execution may be supported by the fact that L&T is primarily

involved in marquee projects, whose demand may be somewhat insulated from the

broader slowdown. L&T’s real estate business touched about Rs200 bn in FY11-14 and is

now running in the range of about Rs150 bn p.a. as per our estimates.

Figure 18: Key projects in buildings segment

Institutional buildings/Govt housing projects Commercial projects Residential real estate

Client, project Location Client, project Location Client, project Location

NISER project (DAE) Bhubaneswar ITC Sonar Hotel Kolkata The Address Wadhwa Mumbai

ESIC Hospital project Kollam Cognizant Elcot IT Park Sholinganallur, Chennai DLF Capital Green Moti Nagar, Delhi

ESIC Hospital project Joka, Kolkata L&T Realty Sanofi Tower Powai, Mumbai Emami City Kolkata

ESIC Hospital project Coimbatore TCS Customer care centre Siruseri, Chennai Godrej Garden City Ph-III Ahmedabad

AIIMS Project Bhubaneshwar TCS Adibatla project Hyderabad Omkar Worli Mumbai

RIL Township Jamnagar Shell NTCB Project Bengaluru Prestige Sunrise Park Bengaluru

IIT Hyderabad ITC Green Centre Project Bengaluru Prestige Lakeside Habitat Bengaluru

BARC Trombay Project Mumbai Omkar Bhoiwada Rehab Mumbai

Riverview-II (Lucknow Dev. Auth.) Lucknow DLF Crest Project Gurgaon

UP Awas Vikas Basement Ghaziabad DLF Maiden Heights Ph – I Bengaluru


20 March 2017


Figure 19: Real estate orders secured since FY15


Transmission projects – reasonable progress across states and central

We note reasonable progress across transmission projects, across both central (Power

Grid Corporation of India) and state sector clients. It is difficult to monitor progress on

Rural electrification projects individually, but we believe that execution would be

satisfactory on those projects as there is strong central government push to complete

these projects in a specified deadline.

Figure 20: Transmission projects status

Date Client Order size

(Rs bn)


Aug-15

Powergrid Corporation

of India

5.0 765kV D/C line from Banaskantha to Chittorgarh Target date of Apr-18; 80% stubs cast

Sep-14 4.0 765 KV S/C transmission line (Lalitpur to Agra) Ready for commissioning

Mar-16 3.0 400 kV D/C transmission line (Cuddapah to Madhugiri) Target date of Feb-19; 20% stubs cast

Jan-15 3.0 Extension of 400/220 kV GIS Parbati pooling, 400/220 kV GIS Gurgaon

substation and 400/220 kV GIS Kanpur susbtation

In advanced stages; to be completed in next

few months

Apr-15 2.7 765 kV double circuit transmission line between Wardha and Hyderabad Target date of Dec-17; 90% towers erected

Mar-16 2.1 765kV double circuit transmission line at Cuddapah Target date of Jul-18; 30% stubs cast

Jun-16 2.0 400 kV D/C transmission line package from Tumkur to Hiryur in Karnataka Target date of Dec-18; on track

Mar-16 2.0 100MVAR STATCOM Installation at Kunta Substation in Anantapur, AP Target date of Jul-18

Sep-16 1.7 400kV Double Circuit Mundra – Bhuj Transmission Line in Gujarat Under construction

Nov-15 1.6 765kV GIS substation package at Aligarh Target date of Apr-18; Engg. in progress

Mar-16 1.2 765 kV double circuit Bhuj Banaskanta transmission line (part-1) Target date of Jul-18; 25% stubs cast

Sep-14 0.5 400/220 kV GIS Substation at Pandiabil in Odisha Ready for commissioning

May-14 PGCIL - Vizag Trans. 1.5 Construction of 765KV D/C transmission line in AP Ready for commissioning

Nov-15 Lucknow metro 4.8 Grid substation and other works Trail run of metro already done; Completed

Aug-15 TANTRANSCO

3.0 400kV double circuit (Quad) transmission line (Kamudhi and Karaikudi) Almost completed (Dec 2016)

Sep-14 3.0 400/230 KV AIS and GIS substations at Karamadai, Coimbatore, Poiyur Completed

Sep-14 1.5 400 KV D/S transmission line between Korattur-Thervaikandikai-Manali ~50% work done; Stuck; awaiting permission

Mar-17 West Bengal SEB 2.7 Strengthening the network in the urban area of Nadia district, West Bengal

(under IPDS)

Recently awarded

Jun-16 Karnataka Solar

Power Dev. Co.

2.0 220/66 kV substations and transmission network (for power evacuation from

proposed 2000 MW Pavagada Solar Park in Tumkur)

Under construction; Targeted in couple of

months

Sep-14 HP Transmission Co. 2.0 400/220/33KV insulated switchgear substation at Lahal, Chamba, HP No progress

Jan-15 UP Power Transco. 1.7 Construction of 400kV double circuit quad transmission lines between Banda-

Orai and Banda-Allahabad regions

Banda-Allahabad near completion; Banda-Orai

85% complete

Jul-14 Bihar Transco. 1.4 220/132KV line between Kanti-Motipur-Muzaffarpur-Bhikanpura Completed

TANTRANSCO - Tamil Nadu Transmission Corporation. Source: Company data, Credit Suisse estimates

Residential52%

Commerial15%

Institutional33%

Composition of real estate orders announced since FY15

20 March 2017


Water projects – higher government skew; mixed progress

Figure 21: Large water projects secured by the company in past few years

Date Customer Order size

(Rs bn)

Project details

Jul-16 Govt. of Telangana 18.5 Construction of a 1632m long concrete barrage with 85 vents including mechanical works

Aug-15 Public Health Engineering Department, Ajmer 14.9 Fluorosis Mitigation project (Nagaur) - Funded by JICA

Dec-15 Water Resource Department, Govt. of Odisha 10.5 EPC work of 34 lift irrigation schemes (30 months)

Jul-16 Water Resources Department of MP 8.4 Balancing reservoir, pumping station at Bansujara left bank’s main canal in Tikamgarh district, MP

Jan-16 Hyderabad Metropolitan Water Supply 5.4 Construction of 650km pipeline, 20 water storage reservoirs, other works

Dec-16 Rajasthan Urban Infra Development Project 5.0 Wastewater infrastructure works at Jhunjhunu

Dec-16 Department of Water Resources, Odisha 5.0 Mega Lift Irrigation Scheme, Cluster IX and XII

Dec-16 Gujarat Water Supply and Sewerage Board 4.2 Narmada River Basin based Bulk water pipeline work - package 2

Aug-14 Uttar Pradesh Jal Nigam 4.1 Agra water supply project (package 5A)

Jul-16 Ahmedabad Municipal Corporation (AMC) 2.0 Construction of a 30 MLD Common Effluent Treatment Plant (CETP) at Danilimda, Ahmedabad


Water projects are a mixed bag with several projects such as Agra, Odisha contracts making

good progress but several other such as barrage project in Telangana facing issues.

Overseas execution steady and so are inflows so far

Figure 22: MEED ordering—Annual

Source: MEED.Com, Credit Suisse estimates

Figure 23: Infrastructure contracts dominate Figure 24: Overseas execution steady despite fears


-40

-20

0

20

40

-

50

100

150

200

CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17E

MEED ordering (USD bn) % yoy (RHS)

Power T&D, 200

Metros, 144

O&G capex, 126

Roads, 80Real estate (resi &

commercial), 75

Thermal generation, 60

Industrial, other infra

projects, 26

Water, 25 Defense, 10

33.2

31.7 32.0

32.0 32.0 32.0 32.0

28.0

30.0

32.0

34.0

-

100

200

300

400

500

600

700

800

900

1,000

FY14 FY15 FY16 FY17E FY18E FY19E FY20E

Overseas EPC order backlog EPC revenuesBook to bill ratio (%, RHS)

(Rs bn)

20 March 2017


Risks lower, but dependence on inflows, steady execution continues

Given the larger individual project size of overseas projects, we are able to highlight status

of a much larger proportion of contracts. Execution remains steady with most projects

making steady progress. Some of the recent projects such as stadiums in Qatar, etc., are

coming up with definite timelines and may stay on course.

Risk perception from the Middle East has reduced given steady execution for the last one-

and-a-half years in spite of oil price drop and as yet no sizeable and specific working

capital and margin issue. However, L&T has continued dependence on this geography in

terms of continued flow of orders at about Rs275 bn in our assumptions (p.a.).

ME ordering run rate US$100 bn p.a. lower than the peak but still on

Total ordering in ME is prevailing about US$100 bn p.a. versus a peak of about US$170

bn in CY15. This suggests that there are select opportunities still available. Our

assumptions build in about US$4 bn of ordering for L&T from ME every year, building in

about a 4% market share for the company in the ME market.

L&T has many client/segment niches to itself

This market share is possible given specific niche opportunities such as (1) gas

compression orders from PDO Oman (three to four projects completed on a trot), (2)

transmission and distribution infrastructure orders from Qatar, etc. (have been mainstay

for almost a decade now even before L&T scaled up ME geography in hydrocarbon and

civil sectors), (3) budding relationship with Saudi Aramco (Midyan completed; Hasbah in

bag recently and then it has some platform orders as well), (4) fabrication presence (Sohar

Oman yard). Several large time bound opportunities are coming up in Dubai and Qatar

related to Dubai Expo 2020 and Qatar world cup (one stadium Rayyan already in the bag).

EMAS-Chiyoda bankruptcy can affect Saudi Aramco project execution

We highlight that EMAS Chiyoda recently won a contract valued at over US$1.6 bn for the

development of the second phase of Hasbah Offshore Gas field situated off the Coast of

Saudi Arabia. LTHE’s share in the contract value is approximately over 60%. EMAS

Chiyoda has filed for bankruptcy in the US courts. We believe that execution can continue

given well-established US bankruptcy laws. The aim of the bankruptcy is to protect the

interest of the company and proceed with the project execution without affecting clients’

interests. Nevertheless, a risk has opened up in this large project for the company.

Guidance – inconsequential; build in substantial miss

We note that L&T has given strong guidance for 4Q and full-year FY17E but we believe

that it is largely inconsequential. We already build in a substantial miss vs. the guidance in

our 4Q estimates. We build in YoY flattish inflows in 4QFY17E, vs. L&T suggesting almost

a 25-26% YoY growth in inflows. L&T guidance implies an order inflow of Rs546 bn versus

we building in an order inflow of Rs456 bn only. It is guiding YoY execution growth of 23%

vs. we building in an execution growth of just 10-12% (variability related to marginal base

correction on account of Ind-AS transition). L&T had grown 18% in 4QFY16 after a growth

of just 9% in 9MFY16. This year also 9MFY17 growth has been just 6%. L&T is guiding for

EPC EBIT margins of 12.8% in 4QFY17 (versus our estimate of about 10.6%). L&T

delivered 11.1% EBIT margin in 4QFY16 driven by 15% EBIT margin in infrastructure

segment (below 7% in 9MFY17).

20 March 2017


Figure 25: Build in miss across all three parameters Figure 26: EPS CAGR driven by margin recovery


Continue to build in 25% EPS CAGR over FY16-19E including losses

In spite of building in a substantial guidance miss in FY17E, L&T can deliver earnings

CAGR of 24% over FY16-19E based on three parts: (1) EPC revenue growth (11%

CAGR), (2) margin normalisation (130 bp+ in EPC) largely on Hydrocarbons and HE, (3) a

15% CAGR in services and (4) lower interest cost and flat depreciation.

Our consolidated earnings build in a Rs8.3 bn loss from the Hyderabad metro in FY19E

(can be lower on de-scoping, claims, real estate and other earnings streams) and does not

build sell-down benefit.

Figure 27: We build 11% revenue CAGR in EPC business over FY16-19E

(Rs bn) FY16 FY19 Sales

Sales EBIT EBIT% Sales EBIT EBIT% CAGR (%)

Infra 506 50 9.9 763 71 9.3 14.7

Power 64 1 1.8 57 2 4.0 (3.9)

Heavy Engg. 33 (1) (3.0) 35 4 10.5 2.8

Elec. & Auto. 54 4 8.0 75 8 10.5 11.4

Hydrocarbon 86 (1) (1.1) 119 10 8.7 11.3

Others 97 10 10.2 106 7 7.0 3.1

EPC total 840 63 7.5 1,155 102 8.8 11.2


Figure 28: We build in ~7% inflow CAGR over FY16-19E from a low base

(Rs bn) FY14 1Q15 2Q15 3Q15 4Q15 FY15 1Q16 2Q16 3Q16 4Q16 FY16 1Q17 2Q17 3Q17 FY17E FY18E FY19E

E&C order inflow 1,141 281 356 301 430 1,367 213 233 331 377 1,154 241 256 294 1,192 1,291 1,399

- Domestic 775 151 307 258 336 1,054 153 146 242 263 804 132 206 200 842 941 1,049

- Overseas - Middle East 366 101 49 43 94 284 60 64 88 103 316 103 42 94 298 298 298

- Overseas - Others - 29 - - - 29 0 23 - 12 34 6 7 - 53 53 53

Services order inflow 131 53 42 45 46 186 51 54 55 56 215 56 55 55 223 248 278

Consolidated order inflow 1,272 334 398 346 476 1,554 264 286 385 433 1,369 297 311 349 1,416 1,540 1,678

Growth yoy (%) 11.4 17.1 19.2 39.1 22.6 (21.0) (28.1) 11.4 (8.9) (11.9) 12.6 8.7 (9.5) 3.4 8.7 9.0


25.9

23.4

12.8

5.2

10.0 10.6

-

5.0

10.0

15.0

20.0

25.0

30.0

Total inflow gth. Sales growth EPC EBIT margin

4Q17E-LT guidance 4Q17E-CS estimate(% )

24

15

11

- 5 10 15 20 25 30

PAT

EBITDA

Revenue

FY16-19E CAGR (%)

20 March 2017


Figure 29: Our TP of Rs1,850 includes Rs1,380 for EPC business at 20x FY19E EPS

PAT/Book Multiple Value Valuation basis Stake L&T's stake value Per share

(Rs bn) (X) (Rs bn) (%) (Rs bn) (Rs)

EPC business 64 20.0 1,290 PE multiple 100.0 1,290 1,383

L&T Finance Holdings 174 Market price 66.7 104 112

L&T Infotech 117 Market price 84.6 89 95

L&T Technology 86 Market price 90.0 70 75

Power equipment JVwth MHI 1.2 15.0 18 P/E 51.0 9 10

Infra SPVs 73 1.00 73 P/B 97.7 71 76

Power development 31 1.00 31 P/B 100.0 31 34

Other subsidiaries 112 0.50 56 P/B 100.0 56 60

Total subsidiaries 431 462

Grand total 1,720 1,845


20 March 2017


Companies Mentioned (Price as of 17-Mar-2017) Larsen & Toubro (LART.BO, Rs1550.7, OUTPERFORM, TP Rs1850.0) NTPC Ltd (NTPC.BO, Rs160.1) Oil and Natural Gas Corporation Limited (ONGC.BO, Rs189.95) Powergrid Corporation (PGRD.BO, Rs194.5) Reliance Industries Limited (RELI.BO, Rs1300.65)

Disclosure Appendix

Analyst Certification I, Lokesh Garg, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Larsen & Toubro (LART.BO)

LART.BO Closing Price Target Price

Date (Rs) (Rs) Rating

19-Mar-14 1246.65 1004.00 U

19-May-14 1524.65 1696.00 O

24-Jul-14 1662.90 NR

20-Nov-14 1642.20 1975.00 O *

10-Feb-15 1573.80 1900.00

08-Jul-15 1804.30 2175.00

23-Sep-15 1495.95 2000.00

20-Oct-15 1572.95 1775.00 N

02-Nov-15 1388.40 1515.00

11-Jan-16 1174.80 1475.00 O

01-Feb-16 1122.15 1425.00

26-May-16 1472.60 1650.00

21-Jul-16 1556.25 1825.00

26-Sep-16 1468.70 1925.00

23-Nov-16 1357.85 1900.00

28-Nov-16 1356.15 1800.00

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

O U T PERFO RM

N O T RA T ED

N EU T RA L

3-Year Price and Rating History for NTPC Ltd (NTPC.BO)

NTPC.BO Closing Price Target Price


19-Mar-14 106.63 133.29 O

11-Jul-14 137.56 NR

14-May-15 139.00 160.00 N *

26-Aug-15 119.75 140.00

05-Oct-15 127.40 160.00 O

30-May-16 143.10 165.00

07-Jul-16 152.80 180.00

09-Feb-17 168.35 180.00 N


O U T PERFO RM

N O T RA T ED

N EU T RA L

20 March 2017


3-Year Price and Rating History for Oil and Natural Gas Corporation Limited (ONGC.BO)

ONGC.BO Closing Price Target Price


15-May-14 252.03 233.33 N

16-Sep-14 272.50 263.33

20-Oct-14 279.23 256.67

21-Oct-14 272.07 250.00

16-Feb-15 227.00 226.67

19-Jun-15 212.63 *

07-Jul-15 203.30 226.67 N

13-Aug-15 179.87 200.00

09-Sep-15 153.73 173.33

20-Nov-15 155.77 173.33 *

27-Jan-16 145.60 163.33

03-Mar-16 131.70 136.67

30-May-16 142.57 146.67

13-Jul-16 156.40 156.67

27-Oct-16 193.70 176.67

23-Dec-16 193.00 *

17-Jan-17 194.90 176.67 N


N EU T RA L

3-Year Price and Rating History for Powergrid Corporation (PGRD.BO)

PGRD.BO Closing Price Target Price


14-May-15 139.50 180.00 O *

30-May-16 151.50 200.00

18-Aug-16 181.95 225.00

13-Feb-17 203.05 235.00


O U T PERFO RM

3-Year Price and Rating History for Reliance Industries Limited (RELI.BO)

RELI.BO Closing Price Target Price


02-Apr-14 956.95 1120.00 O

11-Jun-14 1101.55 1230.00

20-Oct-14 934.50 1160.00

21-Oct-14 929.15 1155.00

19-Jan-15 879.85 1040.00

19-Jun-15 996.50 *

27-Jul-15 1005.80 1180.00 O

09-Sep-15 873.05 1100.00

05-Oct-15 886.25 1040.00 *

20-Jan-16 1004.35 1050.00 N

25-Apr-16 1016.15 1075.00

10-Oct-16 1095.95 1055.00

01-Dec-16 997.20 1035.00

23-Dec-16 1058.15 *

17-Jan-17 1041.30 1020.00 N

06-Mar-17 1304.90 1200.00


O U T PERFO RM

N EU T RA L

20 March 2017


The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for Larsen & Toubro (LART.BO)

Method: Our SoTP (sum-of-the parts)-derived target price for Larsen & Toubro is Rs1,850, which comprises Rs1,380 for E&C business, valued at 20X Sep-18E EPS, and the remaining amount for subsidiaries. These include the listed financial services business (valued at market price), IT and technology businesses (valued at respective market caps), power equipment JV (PE basis), infrastructure SPVs (at 1x book), power development business (1x book) and other subsidiaries (0.5x book). Our OUTPERFORM rating reflects our view on stock

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20 March 2017


price performance relative to market over next 12 months, based on domestic execution pick-up, a steady Middle East, reducing working capital and reasonable valuations.

Risk: Downside risks to our Rs1,850 target price and OUTPERFORM rating for Larsen & Toubro include a slower-than-expected recovery in the domestic market, margin risk in the E&C business, delays in the implementation of reforms, negative surprises to our road traffic estimates and delays in execution. In case downside risks play out, there could be a risk to our Outperform rating.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (LART.BO, NTPC.BO, ONGC.BO, RELI.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (LART.BO, NTPC.BO, ONGC.BO, RELI.BO) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (PGRD.BO). Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014 Credit Suisse may have interest in (LART.BO, NTPC.BO, PGRD.BO, ONGC.BO, RELI.BO)

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Seoul Branch; Taiwan: Credit Suisse AG Taipei Securities Branch; Indonesia: PT Credit Suisse Securities Indonesia; Philippines:Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Additional Regional Disclaimers Hong Kong: Credit Suisse (Hong Kong) Limited ("CSHK") is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an Australian financial services licence (AFSL) and is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (the Act) under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Act). Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Australia (to the extent services are offered in Australia): Credit Suisse Securities (Europe) Limited (“CSSEL”) and Credit Suisse International (“CSI”) are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority under UK laws, which differ from Australian Laws. CSSEL and CSI do not hold an Australian Financial Services Licence (“AFSL”) and are exempt from the requirement to hold an AFSL under the Corporations Act (Cth) 2001 (“Corporations Act”) under Class Order 03/1099 published by the Australian Securities and Investments Commission (“ASIC”), in respect of the financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's professional clients and eligible counterparties as defined by the FCA, and wholesale clients as defined under section 761G of the Corporations Act. Credit Suisse (Hong Kong) Limited (“CSHK”) is licensed and regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. CSHKL does not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1103 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Credit Suisse Securities (USA) LLC (CSSU) and Credit Suisse Asset Management LLC (CSAM LLC) are licensed and regulated by the Securities Exchange Commission of the United States under the laws of the United States, which differ from Australian laws. CSSU and CSAM LLC do not hold an AFSL and is exempt from the requirement to hold an AFSL under the Corporations Act under Class Order 03/1100 published by the ASIC in respect of financial services provided to Australian wholesale clients (within the meaning of section 761G of the Corporations Act). Malaysia: Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. Singapore: This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore Branch to overseas investors (as defined under the Financial Advisers Regulations). Credit Suisse AG, Singapore Branch may distribute reports produced by its foreign entities or affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact Credit Suisse AG, Singapore Branch at +65-6212-2000 for matters arising from, or in connection with, this report. By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore Branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the “FAA”), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore Branch may provide to you. UAE: This information is being distributed by Credit Suisse AG (DIFC Branch), duly licensed and regulated by the Dubai Financial Services Authority (“DFSA”). Related financial services or products are only made available to Professional Clients or Market Counterparties, as defined by the DFSA, and are not intended for any other persons. Credit Suisse AG (DIFC Branch) is located on Level 9 East, The Gate Building, DIFC, Dubai, United Arab Emirates. EU: This report has been produced by subsidiaries and affiliates of Credit Suisse operating under its Global Markets Division In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-US customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. US customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the US. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials,management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2017 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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