Larsen & Toubro (LARTOU) | 1760 - ICICI...

May 30, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

Balance sheet mend continues…

Larsen & Toubro (L&T) reported a mixed set of Q4FY17 numbers. The

company reported healthy topline growth. However, muted

execution in some segments impacted EBITDA and PAT growth. L&T

reported strong order intake of | 47,289 crore, up 9.6% YoY. Also,

going forward, the company has guided at 12% growth in its

revenue and 12-15% growth in its order intake. L&T reported a

significant improvement in cash-flows. In Q4FY17, CFO came in at

| 7300 crore (up by | 3000 crore YoY) and | 12,200 crore in FY17,

which is up 58.4% YoY (| 7700 core in FY16). From a balance sheet

perspective, net working capital also saw a significant improvement

to 19% of sales in FY17 from 23% of sales in FY16

Standalone revenues for the quarter grew 5.5% YoY to | 23,499.6

crore vs. our estimate | 22708.1 crore. On a consolidated basis,

revenues came in at | 36800 crore, up 12% YoY. Infrastructure

segment revenues disappointed, up 10% while hydrocarbon

segment revenues grew 6% YoY. On the negative side, revenues

from the power, heavy engineering segment fell 3%, 4% respectively

Standalone EBITDA margin was at 12.9% whereas consolidated

margins were at 11.8%. Key miss was from margin disappointment

in infrastructure segment wherein EBITDA margins for Q4FY17 were

at 13.5% vs. 16.1% in Q4FY16. On the positive side, heavy

engineering segment reported strong revenue of 26% whereas

hydrocarbon saw a solid recovery in margin to 9.8% in Q4FY17

Execution in international market to remain robust; domestic likely to

recover in FY18E

For FY17, revenues from international markets grew in excess of 15%

YoY on the back of planned execution wherein domestic revenues were

a laggard during FY17 on the back of liquidity issues, client side delays

and demonetisation (impacting the buildings and factories segment).

Going ahead also, FY18E will see growth in excess of 15% YoY wherein

domestic execution is likely to witness a gradual up-tick. The

management guidance of 12% growth builds in a moderate pick-up in

domestic execution. Going ahead, we have pencilled in 10% and 13%

YoY growth in standalone revenues in FY18E and FY19E, respectively.

Balance sheet mend gaining traction

From a balance sheet perspective, net working capital saw a significant

improvement during Q4FY17 as the same was at 19% of sales vs. 23%

of sales in FY16. Even from a cash flow perspective, the company

generated CFO to the tune of | 12200 crore in FY17 vs. | 7700 crore in

FY16. This is also reiterated by interest costs that were down, on a

standalone, consolidated basis, by 10.2%, 6% YoY, respectively.

Best play on domestic capex cycle recovery; maintain BUY

Focus on improvement of working capital, generation of cash flows and

staying away from BoT assets make us believe that L&T is moving in the

right direction. This has laid a strong foundation for the next leg of

growth. Going ahead, we expect L&T to deliver 11.5% and 10% PAT

CAGR, respectively, in FY17-19E. With most equity infusion in L&T IDPL

over, we expect L&T’s road to improvement of RoEs to be achievable.

Post the recent rally, we expect L&T to have further legs to make an up

move as we believe it is the best play on domestic capex recovery. We

upgrade the target price to | 2090 (SoTP basis) and maintain BUY.

Rating matrix

Rating : Buy

Target : | 2090

Target Period : 12 months

Potential Upside : 19%

What’s Changed?

Target Chnaged from |1635 to |2090

EPS FY18E Changed from | 65.2 to | 65

EPS FY18E Introduced at | 69.5

Rating Unchanged

Quarterly Performance

Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%)

Revenue 23,499.7 21,061.3 11.6 12,150.0 93.4

EBITDA 3,021.1 3,193.2 -5.4 964.2 213.3

EBITDA (%) 12.9 15.2 -231 bps 7.9 492 bps

PAT 1,254.2 2,616.4 -52.1 550.1 128.0

Key Financials

| Crore FY16 FY17E FY18E FY19E

Net Sales 59,779.6 66,301.4 73,027.7 82,459.7

EBITDA 6,182.1 6,425.2 7,835.2 8,858.6

Net Profit 5,064.1 4,708.2 6,015.2 6,427.0

EPS (|) 54.8 50.9 65.0 69.5

Valuation summary

es

FY16 FY17E FY18E FY19E

P/E 32.0 34.4 26.9 25.2

Target P/E 26.9 29.0 22.7 21.2

EV / EBITDA 26.4 26.1 21.8 19.1

P/BV 4.1 3.8 3.5 3.2

RoNW (%) 12.8 11.1 13.0 12.8

RoCE (%) 10.3 10.0 11.5 12.1

Stock data

Particular Amount

Market Capitalization | 161857.5 Crore

Total Debt (FY17) |10500 Crore

Cash and Investments (FY17) |3000 Crore

EV |169358 crore

52 week H/L |1893/ | 1069

Equity capital | 185 Crore

Face value | 2

Price performance (%)

1M 3M 6M 12M

Larsen & Toubro Ltd 4.8 (4.9) 9.0 59.8

BHEL 1.5 3.8 17.0 66.0

Thermax Ltd 5.0 10.5 30.5 75.4

Crompton Greaves (14.7) (13.5) (16.0) 37.1

Larsen & Toubro (LARTOU) | 1760

Research Analyst

Chirag Shah

[email protected]

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

Q4FY17 Q4Y17E Q4FY16YoY (Chg %) Q3FY17QoQ (Chg %) Comments

Revenue 23,499.7 22,708.1 21,061.3 11.6 12,150.0 93.4 Revenues were higher than estimates on account of better execution

in heavy engineering, E&A and others segment

Other Income 345.3 567.7 736.7 -53.1 482.6 -28.4

Employee Expenses 1,364.1 1,112.7 1,037.2 31.5 1,289.8 5.8

Raw Material Expenses 15,832.0 17,144.6 16,213.1 -2.4 9,244.1 -154.0

Other Operating Expenses 836.5 772.1 617.8 35.4 652.0 28.3

EBITDA 3,021.1 3,678.7 3,193.2 -5.4 964.2 213.3 EBITDA was lower than expectations owing to higher employee

expenses and other operating expenses

EBITDA Margin (%) 12.9 16.2 15.2 -231 bps 7.9 492 bps

Depreciation 396.3 277.3 254.5 55.7 279.3 41.9

Interest 269.3 365.2 397.3 -32.2 331.1 -18.7 Better working capital management led to lower interest costs

PBT 2,700.8 3,603.9 3,278.0 -17.6 836.3 223.0

Total Tax 485.7 899.8 661.6 -26.6 286.2 69.7

PAT 1,254.2 2,704.1 2,616.4 -52.1 550.1 128.0 PAT was below estimates on account on miss on margins and one-off

to tune of | 961 crore

Key Metrics

Order inflows 34,900.0 30,000.0 38,700.0 -9.8 31,000.0 12.6 Order inflow was better than estimates

Order backlog 258,600.0 255,000.0 255,000.0 1.4 251,000.0 3.0 Backlog provides strong visibility for next two to three years

Source: Company, ICICIdirect.com Research

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenue 76,017.6 73,027.7 -3.9 - 82,459.7 -

EBITDA 8,161.0 7,835.2 -4.0 - 8,858.6 -

EBITDA Margin (%) 10.7 10.7 -1 bps - 10.7 -

PAT 6,030.8 6,015.2 -0.3 - 6,427.0 -

EPS (|) 65.2 65.0 -0.3 - 69.5 -

We have revised the margins down due to execution issues

Lower margins in FY17E has led to downward revision of PAT

FY18E FY19E

Comments


Assumptions

Comments

FY16 FY17 FY18E FY19E FY18E FY19E

Order Inflow growth -16.3 -3.7 12.4 13.4 14.1 - In term of order inflows, infrastructure segment (both domestic and international)

will dominate intake while hydrocarbon and defence are also expected to

contribute significantly

Order Backlog growth 7.4 1.2 4.4 30.7 4.0 -

Revenue growth 4.8 10.9 10.1 12.9 16.0 - Execution in domestic market will pick up in FY18E on a low base

EBITDA Margins 10.3 9.7 10.7 10.7 10.7 -

Current Earlier



Key results and analyst meet highlights

L&T reported a strong order intake of | 47,289 crore, up 9.6% YoY.

Also, going forward, the company has guided 12% growth in its

revenue and 12-15% growth in its order intake. In terms of

opportunities, L&T expects to bag orders to the tune of | 15000 crore

and | 10000 crore from the hydrocarbon and the defence segment.

The order inflow growth expectation is 10-15% growth in the

infrastructure segment. In MENA markets, the management

commentary seems to be mixed badly as they expects Saudi Arabia

and Kuwait to continue to spend on downstream hydrocarbon and

power T&D while countries like Oman and Qatar are expected to see a

slowdown in ordering trends

During Q4FY17, the company reported a backlog of | 216000 crore.

However, the company removed | 18000 crore worth of non/slow

moving orders from the backlog. These orders were from the building

& factories and Power T&D space

In terms of segmental performance, infrastructure segment revenues

grew 4% YoY to | 202300 crore while power segment reported a

flattish YoY performance. Hydrocarbon & heavy engineering reported

revenues to the tune of | 2579 crore and | 1035 crore, respectively

The company has guided for 12% revenue growth guidance and 12-

14% order inflow growth guidance for FY18E. The margins are

expected to improve 50 bps

From a balance sheet perspective, net working capital saw a

significant improvement during Q4FY17 as the same was at 19% of

sales vs. 23% of sales in FY16. From a longer basis, the company

expects the ratio at 18% of sales by FY21E

In Q4FY17, CFO came in at | 7300 crore (up by | 3000 crore YoY) and

| 12,200 crore in FY17, which is up 58.4% YoY (| 7700 core in FY16).

The consolidated debt was at | 94000 crore while standalone debt

reduced from | 14000 crore to | 10500 crore as of Q4FY17

The work on Hyderabad metro is completed to the tune of 70%. The

project is slated to be fully commissioned by December 2018. The

company is expecting a favourable settlement with the respective

state government within next year


Company Analysis

Macros sensitivity does impact L&T’s prospects but intensity moderating

L&T’s order inflows have scaled up by ~8x in FY04-15, representing a

robust CAGR of 23% over the same period. In absolute terms, L&T’s order

inflows were at | 13,200 crore in FY04, which have eventually scaled up

to | 126500 crore by FY15 (excluding hydrocarbon business). This

outsized growth in order flows is attributable to a high quality

management, superior and timely execution track record, capability to

execute mega sized projects across segments, stringent risk management

techniques, timely diversification across sectors/geographies and credible

reputation among private sector clients. Revenue growth as a percentage

of GDP growth has averaged at 1.4x while order inflow growth as a

percentage of GDP growth has averaged at 1.7x in FY05-14. Going ahead,

even though capital formation is weak, we expect L&T to maintain a ratio

of 1.2x and 1.5x with respect to revenues and order inflows, respectively,

vis-à-vis GDP growth. We expect L&T to report revenue CAGR of 11.5% in

FY17-19E, on a high base. We expect L&T to report standalone revenues

of | 73028 crore and | 84560 crore in FY18E and FY19E, respectively.

Over the next three to five years, we expect L&T’s revenue growth to be

propelled by the infrastructure division as over 75% of the backlog and

50% of the new order wins are coming from these segments. We have

noted that L&T has been able to meet most its yearly guidances across

order inflow growth, revenue growth and margins.

Exhibit 1: Trend in revenue growth

333.7369.7

438.5

531.9

608.3568.4586.7

617.0663.0

730.3

824.6

0

100

200

300

400

500

600

700

800

900

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

(|

billion)

-10

0

10

20

30

40

(%

)

Revenue YoY Growth

Source: Company, ICICIdirect.com, Research

Exhibit 2: How has L&T fared vis-à-vis its cycles across business cycles

Guidance Achievement Guidance Achievement

FY08 30 40 30-35 45

FY09 30 28 30.00 47

FY10 25-35 41 15-20 14

FY11 25 14 20.00 19

FY12 5 -12 25 21

FY13 15-20 25 15-20 15

FY14 15-20 15 15 10

FY15 20 22 15 3

FY16 0 -13 15 12

FY17 10 5 10 5

FY18E 43083 - 12 -

Inflow Growth (%) Revenue Growth (%)

Source: Company, ICICIdirect.com, Research

Diversity: L&T’s biggest USP both during up/down turns in capex cycle

L&T’s current order backlog of | 261300 crore (Q4FY17, excluding

hydrocarbon & services) is highly diversified across segments and

geographies. Out of the current backlog, the infrastructure segment

(roads, buildings & factories, urban infra, airports) comprises 75% of the

backlog whereas power (generation & T&D) and process (metals &

material handling) segment’s share is at 5% and 5%, respectively. Others

(defence, shipbuilding and electronic products), on the other hand,

constitute 9% of the backlog. However, with the focus of the government

on reforming the power sector and opening of defence sector and L&T’s

vigorous efforts to scale up international hydrocarbon business (vision of

$5 billion in revenues), share of these segments can rise sharply in the

next five years.


Going ahead, we have built in order inflows of | 114100 crore and

| 129300 crore in FY17E and FY18E, respectively. We expect L&T to end

with a standalone order backlog of | 324220 crore by FY19E end.

Exhibit 3: Break-up of backlog

39%

36%

41%

33%

36%

43%

49%

67%

69%

70%

78%

70%

68%

71%

71%

75%

75%

74%

75%

74%

16%

16%

22%

30%

32%

28%

28%

10%

9%

8%

10%

9%

11%

10%

10%

8%

8%

7%

6%

5%

19%

23%

14%

15%

12%

10%

8%

6%

6%

6%

7%

7%

7%

6%

5%

6%

8%

8%

10%

12%

14%

16%

16%

16%

15%

10%

9%

9%

7%

6%

4%

5%

5%

5%

5%

4%

3%

3%

5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14*

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q3FY16

Q4FY16

H1FY17

9MFY17

FY17

Infrastructure Power Hydrocarbons Process Others


*: Does not include Hydrocarbon segment orders as the division was hived off into separate subsidiary.

Margins to improve gradually to 10.7% by FY19E

EBITDA margins have averaged at 11.4% in FY08-16. EBITDA margin,

primarily, is a function of the order book mix and commodity prices. The

E&C segment (80-85% share in total EBITDA) and E&E segment (5-7%

share in total EBITDA), carry a margin of nearly 11% while segments like

M&IP and others carries heftier margins averaging 15-20%. However,

going ahead, with higher execution of international orders, infrastructure

segment margins will see a structural shift. We believe that a decline in

margins is getting played out currently as margins in FY15 and FY16 were

at 11.4% and 10.3% (excluding hydrocarbon), respectively. They were

also hit by weak execution in the heavy engineering and MMH division

owing to the weak outlook of these segments. Going ahead, we expect

margins to be back at 10.7% in FY18E and FY19E.

Exhibit 4: Trend in EBITDA margins

9.9

11.4 11.5

12.8 12.8

11.7

10.5

11.811.4

10.3

9.7

10.7 10.7

5

7

9

11

13

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

(%

)



From FY14 onwards, L&T has started reported segmental margins from

and to the Street’s surprise, infrastructure segments margins have ranged

at 11-13% while the main disappointment came in from the hydrocarbon

segment, which ranges at 7-8% as execution has been lumpy while lower

orders and high operating leverage (commissioning of new BTG facility)

have led to low single digit margins in the power segment.

Exhibit 5: Trend in segmental EBITDA margins

Q4FY17 Q4FY16 FY17 FY16

Infrastructure 13.5 16.1 10.2 11.2

Power 3.8 -1.2 3.5 2.7

Heavy Engineering 27.6 2.7 19.9 0.6

Hydrocarbon 7.8 1.5 5.8 1.7

E&A 19.4 17.1 15.1 12.5

Others 14.8 14.5 10.9 14.6


PAT CAGR of 10% in FY17-19E owing to pick-up in execution cycle,

gradual uptick in EBITDA margins in FY18E

We expect revenue CAGR of 11.5% in FY17-19E while EBITDA CAGR in

the same period is expected at 17.5%. Our PAT CAGR in FY17-19E stands

at ~10% as we have assumed a moderate rise in other income

component in FY17-19E over FY16 while depreciation is expected to

exhibit a CAGR of ~9%. Hence, we expect PAT at | 6427 crore in FY19E

vs. | 5428 crore in FY17.

Exhibit 6: Trend in profitability…

2172.4

3481.4

4417.1

4006.8

4416.54729.5

4996.65006.75064.1

5458.2

6015.2

6427.0

0

1000

2000

3000

4000

5000

6000

7000

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

(|

crore)

-20

-10

0

10

20

30

40

50

60

70

(%

)

PAT YoY growth


RoEs: Walking the talk in creating shareholder value

The RoEs of standalone base business used to average between 24% and

27% in FY08-10. However, the same has declined to 16-17% in FY11-13

as L&T’s investments in BOT assets (road, power, urban infra) rose from

| 5740 crore in FY10 to | 15168 crore in FY14.

Investments in subsidiaries have grown at a CAGR of 22% (low base)

over FY10-13. The management’s decision of significantly slowing down

new BOT assets investment coupled with divestures of non strategic

subsidiaries/JVs and possible monetisation of L&T IDPL will reduce

pressure on standalone RoEs.


Exhibit 7: Trend in RoEs

23.6

18.117.4

16.3

15.0

13.712.8

11.1

13.0 12.8

0

5

10

15

20

25

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E


The key impediment in the medium term would be the low utilisation of

facilities at the shipbuilding business and the NPCIL JV, which are making

losses at these juncture. Going ahead, as per the management, the

shipbuilding business would be limited to | 100 crore.

Out of the above, a few service oriented subsidiaries are cash flow

generators (L&T Infotech and L&T Finance holdings) and will not burden

the parent’s balance sheet for growth. Going ahead, the management

expects to hive off Nabha Power and restructure L&T IDPL in FY17-19E, in

order to ease pressure on parents cash flows and meet funding

requirements in the developmental assets.

Going ahead, L&T’s management has clearly shifted its focus on reducing

the equity funding stress on base business balance sheet and

simultaneously monetise non strategic subsidiaries to raise future equity

requirement for the subsidiary.

Going ahead, we expect L&T to report RoEs in the range of 11-13% for

the standalone business in FY17-19E. However, the scenario may

drastically change in FY19-20, as 1) L&T has already divested its entire

stake in Dhamra port, which will free up equity required in developmental

portfolio, 2) L&T has signalled a possible stake sale of 20-25% in IDPL

wherein it has already roped in a strategic investor to the tune of | 2000

crore of equity, 3) losses of shipbuilding business will reduce significantly

if the capex cycle recovers in time with the opening up of the defence

sector. These subsidiaries will turn into black and 4) the company is close

to selling its Nabha Power plant, general insurance business and also

restructuring L&T IDPL. These actions, in our view, will be RoE accretive

from FY18E onwards.


Outlook and Valuation

Focus on improvement in working capital, generation of cash flows and

staying away from BoT assets makes us believe that L&T is moving in the

right direction, which has laid the strong foundation for the next leg of

growth. Going ahead, we expect L&T to deliver 11.5% and 10% PAT

CAGR in FY17-19E. With most equity infusion in L&T IDPL over, we

expect L&T’s road to improve RoEs is achievable. Post the recent rally,

we expect L&T to have further legs to make an up move as we believe it

is the best play on a domestic capex recovery. We upgrade the target

price to | 2090 (SoTP basis) and maintain BUY recommendation.

Exhibit 8: SOTP valuation for L&T

Company (|per share) Bull case % of total Base Case % of total Bear Case % of total

Base Business 1668 68.8 1494.3 71.5 962.2 70.3

L&T Finance Holdings 164 6.8 164 7.9 115 8.4

L&T Infotech 195 195.2 9.3 146.4 10.7

L&T Power Development 26 1.1 17.1 0.8 11.4 0.8

L&T MHI JV 20 0.8 11.4 0.5 8.5 0.6

L&T IDPL 262 10.8 157.3 7.5 83.9 6.1

Other E&C, MIP & E&E Subs 43 1.8 30.5 1.5 22.4 1.6

Hydrocarbon 46 1.9 35 1.7 18 1.3

Total 2425 100.0 2090 100.0 1368 100.0



Recommendation History vs. Consensus eses

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

0

500

1,000

1,500

2,000

2,500

May-17Mar-17Dec-16Oct-16Aug-16May-16Mar-16Dec-15Oct-15Jul-15May-15

(%

)

(|)

Series1 Idirect target Consensus Target Mean % Consensus with Buy

Source: Bloomberg, Company, ICICIdirect.com Research

Key events

Date Event

Sep-10 L&T files DHRP for IPO of finance subsidairy L&T Finance Holdings Ltd. The IPO size was to the tune of | 1500 crore

Apr-11 L&T Metro Rail (Hyderabad) Ltd, the SPV incorporated to implement the Hyderabad Metro Project achieves financial closure for the project. The financial closure was

achieved in a record time of six months

Dec-11 Mitsubishi Heavy Industries (MHI), Japan plans to sign a technological collaboration agreement with L&T Shipbuilding (LTSB) to provide a broad range of

technological support for the construction of commercial vessels

Mar-12 L&T and Samsung Techwin Co, Ltd (STW) of South Korea announce they would be cooperating with the Indian Army’s Tracked Self Propelled Artillery Programme.

Mar-13 LT anoounces bonus issue in the ratio of 1:2. This means 1 bonus share for every 2 share held

Jul-13 L&T wins its biggest ever civil construction order worth |8250 crore to build a metro rail project in Saudi Arabia

Dec-13 L&T applies with FIPB for induction of strategic equity partner. The investor will invest equity of | 1000 crore each in two tranches.

Mar-14 L&T ends FY14 with another strong set of financial performance with revneues and order inflows up 19% and 15% YoY, respectively. Coupled with L&T sets strong

set of guidance for FY15E performance

Sep-14 Weak execution mars L&T's perfromace in Q2FY15 even though L&T reported 17% YoY order inflows to the tune of | 39797 crore. The ghost of hydrocarbon bsuiness

is gradullay receding back as L&T managed to post marginla EBIT loss of |54 crore as against |900 crore loss in Q1FY15.


Top 10 Shareholders Shareholding Pattern

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Life Insurance Corporation of India 31-Mar-17 15.7 146.4 0.0

2 L&T Employees Welfare Foundation 31-Mar-17 12.3 114.8 0.0

3 UTI Asset Management Co. Ltd. 31-Mar-17 6.5 61.1 0.0

4 HDFC Asset Management Co., Ltd. 31-Mar-17 3.3 30.7 1.4

5 ICICI Prudential Asset Management Co. Ltd. 31-Mar-17 2.0 18.6 0.8

6 ICICI Prudential Life Insurance Company Ltd. 31-Mar-17 2.0 18.3 1.2

7 General Insurance Corporation of India 31-Mar-17 1.8 16.8 -1.1

8 GIC Private Limited 31-Mar-17 1.5 14.2 0.4

9 Reliance Nippon Life Asset Management Limited 31-Dec-16 1.4 12.9 0.1

10 SBI Funds Management Pvt. Ltd. 31-Mar-17 1.1 10.4 0.3

(in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Promoter 0.00 0.00 0.00 0.00 0.00

FII 16.59 16.74 16.59 16.64 17.60

DII 38.92 39.15 38.92 39.91 39.28

Others 44.49 44.11 44.49 43.45 43.12

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor Name Value Shares Investor Name Value Shares

Government of India +192.31M +9.69M General Insurance Corporation of India -25.50M -1.05M

HDFC Asset Management Co., Ltd. +34.75M +1.43M Eastspring Investments (Singapore) Limited -22.59M -1.03M

ICICI Prudential Life Insurance Company Ltd. +28.14M +1.16M Naik (A M) -9.67M -0.36M

Axis Asset Management Company Limited +31.45M +1.16M Waddell & Reed Investment Management Company -6.39M -0.26M

Lyxor Asset Management +30.52M +1.12M JPMorgan Asset Management (Japan) Limited -3.50M -0.17M

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY16 FY17 FY18E FY19E

Total operating Income 59,779.6 66,301.4 73,027.7 82,459.7

Growth (%) 4.8 10.9 10.1 12.9

Raw Material Expenses 8,958.5 8,938.3 8,675.8 9,804.4

Employee Expenses 4,481.9 5,146.9 5,535.0 6,247.7

Other Operating Expenses 32,997.8 36,636.4 42,254.3 47,701.7

Sales, administration & Other Expenses2,498.6 2,744.8 2,651.0 2,993.0

Other Manufacturing Expenses 4,660.8 6,409.9 6,076.4 6,854.3

Total Operating Expenditure 53,597.6 59,876.2 65,192.5 73,601.1

EBITDA 6,182.1 6,425.2 7,835.2 8,858.6

Growth (%) -4.7 3.9 21.9 13.1

Depreciation 700.5 1,020.2 1,108.8 1,212.9

Interest 1,449.0 1,318.0 1,197.8 1,264.3

Other Income 2,394.7 1,972.0 2,600.0 2,800.0

PBT 6,441.7 6,058.9 8,128.6 9,181.4

Others 0.0 0.0 0.0 0.0

Total Tax 1,377.7 1,350.7 2,113.4 2,754.4

PAT 5,064.1 4,708.2 6,015.2 6,427.0

Growth (%) 1.1 -7.0 27.8 6.8

EPS (|) 54.8 50.9 65.0 69.5


Cash flow statement | Crore


Profit after Tax 5,064.1 4,708.2 6,015.2 6,427.0

Add: Depreciation 700.5 1,020.2 1,108.8 1,212.9

(Inc)/dec in Current Assets -8,798.8 -11,429.9 -4,141.7 -6,616.2

Inc/(dec) in CL and Provisions 6,020.1 5,279.6 -1,531.9 5,557.4

Others - - - -

CF from operating activities 2,985.8 -421.8 1,450.4 6,581.1

(Inc)/dec in Investments 1,021.9 -1,000.0 -1,000.0 -1,000.0

(Inc)/dec in Fixed Assets -365.0 -1,050.0 -1,550.0 -1,000.0

Others 0.0 0.0 0.0 0.0

CF from investing activities 497.3 -2,100.0 -2,550.0 -2,000.0

Issue/(Buy back) of Equity 0.4 0.0 0.0 0.0

Inc/(dec) in loan funds 0.0 0.0 0.0 0.0

Dividend paid & dividend tax -1,840.8 -2,016.3 -2,217.9 -2,419.5

Inc/(dec) in Sec. premium 0.0 0.0 0.0 0.0

Others 0.0 7.6 0.0 0.0

CF from financing activities -1,246.7 -4,016.3 -1,217.9 -1,719.5

Net Cash flow 2,236.5 -6,538.1 -2,317.5 2,861.5

Opening Cash 9,995.8 12,232.3 5,694.1 3,376.6

Closing Cash 12,232.3 5,694.1 3,376.6 6,238.1


Balance sheet | Crore


Liabilities

Equity Capital 186.3 186.3 186.3 186.3

Reserve and Surplus 39,122.7 41,814.6 45,611.9 49,619.3

Total Shareholders funds 39,309.0 42,000.9 45,798.2 49,805.6

Total Debt 13,608.3 11,608.3 12,608.3 13,308.3

Deferred Tax Liability 203.4 153.4 153.4 153.4

Minority Interest / Others 0.0 0.0 0.0 0.0

Total Liabilities 53,420.9 54,062.8 58,860.0 63,567.5

Assets

Gross Block 13,632.3 14,583.0 16,083.0 17,083.0

Less: Acc Depreciation 5,823.7 6,843.9 7,952.8 9,165.6

Net Block 7,808.6 7,739.1 8,130.2 7,917.4

Capital WIP 250.7 300.0 300.0 300.0

Total Fixed Assets 8,059.3 8,039.1 8,430.2 8,217.4

Investments 12,339.6 13,339.6 14,339.6 15,339.6

Inventory 1,888.0 1,728.9 2,272.6 2,697.6

Debtors 26,309.2 27,126.7 30,011.4 31,628.4

Loans and Advances 13,236.9 14,486.6 16,185.0 18,448.1

Other Current Assets 21,642.5 31,164.2 30,179.1 32,490.3

Cash 12,232.3 5,694.1 3,376.6 6,238.1

Total Current Assets 75,308.8 80,200.5 82,024.7 91,502.4

Creditors 22,118.8 23,509.8 23,008.7 25,980.5

Provisions 3,063.9 4,702.0 3,451.3 3,637.3

Total Current Liabilities 42,539.7 47,819.3 46,287.4 51,844.8

Net Current Assets 32,769.1 32,381.2 35,737.3 39,657.6

Others Assets 0.0 0.0 0.0 0.0

Application of Funds 53,420.9 54,062.8 58,860.0 63,567.5


Key ratios


Per share data (|)

EPS 54.8 50.9 65.0 69.5

Cash EPS 62.3 61.9 77.0 82.6

BV 428.3 457.4 498.4 541.7

DPS 18.4 20.0 22.0 0.0

Cash Per Share 132.3 61.6 36.5 67.4

Operating Ratios (%)

EBITDA Margin 10.3 9.7 10.7 10.7

PBT / Total Operating income 10.8 9.2 11.1 11.1

PAT Margin 8.5 7.1 8.2 7.8

Inventory days 12.5 10.0 10.0 11.0

Debtor days 160.6 150.0 150.0 140.0

Creditor days 135.1 130.0 115.0 115.0

Return Ratios (%)

RoE 12.8 11.1 13.0 12.8

RoCE 10.3 10.0 11.5 12.1

RoIC 13.4 11.2 12.2 13.4

Valuation Ratios (x)

P/E 26.3 28.3 22.1 20.7

EV / EBITDA 21.8 21.6 18.2 15.8

EV / Net Sales 2.3 2.1 2.0 1.7

Market Cap / Sales 2.2 2.0 1.8 1.6

Price to Book Value 3.4 3.1 2.9 2.7

Solvency Ratios

Debt/EBITDA 2.2 1.8 1.6 1.5

Debt / Equity 0.3 0.3 0.3 0.3

Current Ratio 1.8 1.7 1.8 1.8

Quick Ratio 1.5 1.6 1.7 1.6



ICICIdirect.com coverage universe (Capital Goods)

CMP M Cap

(|) TP(|) Rating (| Cr) FY16 FY17 FY18E FY16 FY17 FY18E FY16 FY17 FY18E FY16 FY17 FY18E

AIA Engineering 1420 1,533 Buy 13064 44.3 50.1 51.9 32.1 28.3 27.4 24.7 21.9 22.4 27.6 22.1 19.6

Thermax (THERMA) 1000 800 Hold 10223 29.6 20.6 27.1 33.8 48.4 37.0 15.3 9.8 11.9 14.2 9.2 10.9

KEC International (KECIN) 250 292 Buy 3881 9.0 10.8 14.1 27.8 23.2 17.7 15.3 15.7 16.8 16.3 15.0 16.5

L&T (LARTOU) 1760 2000 Buy 162800 51.4 52.0 65.0 34.2 33.8 27.1 10.3 10.0 11.5 12.5 12.8 13.0

Greaves Cotton (GREAVE) 155 176 hold 3782 6.6 7.1 8.7 23.5 21.8 17.8 18.0 24.5 26.9 19.5 20.8 23.8

VaTech Wabag (VATWAB) 675 630 Buy 2661 16.9 28.7 36.4 29.0 17.1 13.5 17.0 20.4 22.2 9.7 14.8 16.5

NRB Bearing (NRBBEA) 123 115 Hold 1115 5.6 5.9 6.5 20.6 19.4 17.8 16.0 16.8 16.9 17.5 16.8 16.5

Timken India (TATTIM) 690 700 Hold 4691 13.5 14.3 15.9 51.1 48.3 43.3 27.8 22.7 24.2 18.2 16.0 15.7

Grindwell Norton (GRINOR) 380 390 Buy 3543 9.4 11.2 12.6 33.9 28.5 25.3 22.7 25.1 26.9 15.5 17.6 18.9

RoE (%)EPS (|) P/E (x) RoCE (%)



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


Disclaimer

ANALYST CERTIFICATION

We /I, Chirag Shah PGDBM, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the

subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

Terms & conditions and other disclosures:

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ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent veri fication has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. 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Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Chirag Shah PGDBM; Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. 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