Cmp-1188
Larsen & Toubro (L&T) is a major technology, engineering, construction, manufacturing and financial services conglomerate, with global operations. L&T addresses critical engineering needs in key sectors – Hydrocarbon, Infrastructure, Power, Process Industries and Defence – for customers in over 30 countries around the world. It is one of the largest and most respected companies in India’s private sector having global presence.Â
L&T is engaged in core, high impact sectors of the economy and its integrated capabilities span the entire spectrum of ‘design to deliver’. With over 7 decades of a strong, customer focused approach and a continuous quest for world-class quality, it has unmatched expertise across Technology, Engineering, Construction, Infrastructure Projects and Manufacturing, and maintain a leadership in all its major lines of business.
Diversified presence
The most important reason for L&T’s ability to withstand the challenges and move on is the company’s scale and diversification. L&T has gone through a phased process of redefining its organization model that facilitates growth through greater levels of empowerment. The new structure is built around multiple businesses designated ‘Independent Companies’ or ‘ICs’. These independent divisions are: Hydrocarbon, Heavy Engineering, L&T Construction, Power, Electrical & Automation, Machinery & Industrial Products, Information Technology, Shipbuilding and Railway Projects.
Infrastructure segment includes roads and bridges, ports, airports, railways, metro rail, factories, water management etc, hydrocarbons segment includes upstream, mid stream and downstream, pipelines and fertilizers, heavy engineering segment includes nuclear power plants, process power plants, defence, aerospace and piping, power segment includes generation, equipments, industrial electrification and T&D, while metals segment includes ferrous, non ferrous and bulk material handling, and rest other segments includes sectors such as services, shipbuilding, realty, material handling, machinery and industrial products, real estate and construction and mining equipments.
L&T is India’s largest E&C company. Apart from core construction activity, L&T has made significant inroads into a diverse range of products and services through its subsidiaries and manufacturing JVs in power BTG, forging and shipbuilding. The company is also involved in various developmental projects in roads, ports, railways and power. Overseas contributes around 18-20% of the business.
Being a diversified giant, L&T will be able to grab orders from all across the segments of the investment cycle. Thus L&T is not dependent on one particular segment. Its diversified business presence in virtually all the segments helps the company to ensure continuous order inflow and execution. Thus the company is not substantially affected if some particular segments are not doing well.Â
Ready for the Next generation strategies
L&T has identified certain thrust areas and strategies for the future which include leveraging ongoing digitalization efforts, operational efficiencies, reducing working capital levels, unlocking business values, foray into new geographies, innovating business, inorganic growth and continuing ROE enhancement.
The Company is planning to build its businesses with new age technologies (IoT, AI, Digitalisation and Analytics) given focus on ‘DIGITALISATION’. Among E&C companies, L&T is an early adopter of digital technologies and is adept at IoT, Lidar, BIM, AI and Machine Learning. The digital initiative drive has started to yield productivity gains and process efficiencies to operations ranging from pre-bid engineering and cost-estimation, project execution and monitoring & supply chain interactions.
Leveraging the domain expertise across diverse industry segments, L&T-NxT targets building a business through the use of new-age technologies such as IoT, digitalisation & analytics, Artificial Intelligence, Augmented / Virtual Reality, Geo-spatial applications and Cyber Security. Given that an increasing number of companies are moving towards Industry 4.0 and adoption of ‘Smart’ product, systems and processes, L&T is planning to capitalise on this upcoming market and capture a significant market share. Management is planning to make this one of the key growth drivers over the long term.
The company is on track to achieve the targets set under Lakshya (FY17-21 roadmap). As part of Lakshya plan, L&T has identified ‘Digitalization’ as a key initiative that will focus on operational effectiveness, facilitate timely completion and help in cost savings. Digital solutions initially concentrated in the Construction business. It aims to improve equipment utilization, increase productivity, save fuel, reduce material wastage and get real-time visibility of all operational aspects. This will enable better monitoring and promote effective decision making to remove bottlenecks and initiate timely completion.
L&T also emphasised on de-risking geographically and has ventured into select African countries, Bangladesh and Sri Lanka which is helping the company largely to de-risk from the Middle East in international markets. Non-Middle East orders constituted 45% of international order book in FY19 versus 31% in FY18. This will help the company insulate itself from volatility in crude prices. Internationally, the new thrust area is towards Renewable energies, Hydrocarbon expansion and Non-oil revenue.
L&T’s focus during FY19 on managing risks was reflected in: de-risking from Middle East, maintaining translation of PAT to cashflow despite liquidity challenges; and restricting rise in contingent liability. It has laid strong foundation and further strengthened its growth pillars for FY 20.
Strong Order book
The order intake for the quarter ended March 31, 2019 at 56,538 crore grew by 14% y-o-y. International order inflow during the quarter at 17,680 crore constituted 31% of the order inflow for the quarter.7
Order intake for FY 19 stood at Rs 176800 crore up by 16% YoY. Strong traction in roads, metro, water, infra, Hydrocarbon and Rural Electrification has resulted in better order book prospects.
Consolidated Order Book of the group stood at 293,427 crore as at FY 19 up by 12% YoY, with international Order Book constituting 22% of the total Order Book.
Infrastructure segment accounts for 77% of total order book, 11% is from hydrocarbon, 4% is from defence, 3% is from power segment, 2% from Heavy engineering, 1% from Electrical and automation and rest is from other segments.Â
Order book position is more secular among various business verticals like hydrocarbons, services, infrastructure, heavy engineering, developmental projects etc. Still public sector continues to drive orders and no wholesome strong investment from pvt sector is visualized.
Private sector accounts for around 20% of order book, Central government around 10%, State government is 30% and PSUs are 40% of order book.
L&T has a dominant position and market share in most operating verticals, be it oil & gas, factories & building, process projects, roads, bridges and industrial structures. This imparts flexibility to cherry-pick projects, which helps optimise overall business profitability.
Strong outlook on spending from various sectors augers well for the company
Metro Rail-Total spends on Metro Rail networks in the country over the next 5 years are expected to be in the region of Rs 4000 Billion
Roads NHAI–Main focus on EPC and HAM, expressways, special bridges and city flyover. The Government aims to reach its ambitious target of building 45 km of roads per day in FY 2020.
Railways -key focus on Mumbai-Ahmedabad high speed rail project, rapid electrification of railway lines and track upgradation/augmentation.
Power T&D – Building presence in parts of East Africa, Algeria, Egypt and some countries of East Asia to enhance growth apart from Central and State utilities in the domestic market.
Hydrocarbon-Prevailing oil prices should spur further investment in oil producing countries.
Heavy Engineering – Sophisticated equipment for oil & gas, fertilizers and power sectors expenditure is expected in next couple of years.
Defense Engineering – Marine infrastructure projects involving dry-docks, marine intake structures and defense naval base projects are expected to kick start in FY2019-20.
Thermal Power Gen – By next year, the business expects around 40 GW of orders in FGD systems and significant opportunities in replacement market. The Government plans to increase nuclear power production to 23 GW by 2031 from the current 7GW. It is gearing up in terms of manufacturing capability and procuring requisite technology to produce turbines of 700 MW capacity relating to PHWR nuclear power plants.
Realty – The real estate sector is slowly picking up as demonstrated via increase in sales. A gradual reduction of unsold inventory and improvement in absorption rates are expected to provide steady revenue and profits, over the next few years. Also, launch of new projects in Mumbai and Chennai should provide growth momentum to this business.
Water Infrastructure -From FY20 onwards, Inland waterways infrastructure may receive focused government attention.
Development Projects -Certain stretches of the Hyderabad Metro Rail were completed in FY19 and a fully commissioned network is expected by FY20. The focus is on monetizing value created in the businesses.
Strong projects pipeline over the next five years in verticals like transportation and factories & buildings augurs well for L&T. Moreover, proven execution record and huge balance sheet equip it to garner higher share of the huge infra capex opportunity over FY19-23E.
Considering significant all-round growth in FY19, the business is expected to leverage strong domestic and global business opportunities in FY20.
Financials
Share Holding Pattern
OutlookÂ
With India undergoing the biggest event in the largest democracy of the world, i.e. general elections in the first quarter, the disruptions in decision making processes could impact key operating parameters in the first half of 2019-20. Nevertheless, with the momentum set on infrastructure building, coupled with incremental tax revenues, the emphasis on investments in areas such as airports, railroads, water supply & distribution, expressway programs, power availability & connectivity, Oil & Gas production and mass rapid transit system is expected to continue. Further revival of stressed businesses and recovery of NPAs are expected to ease the concerns on liquidity and perk-up the business sentiment. Improved credit growth is also expected to aid an uptick in private capex in areas of transportation infrastructure, green energy, commercial real estate, digital technology and services.
On the International front, with the dynamic trade relations and evolving protectionist policies, disruptions in business environment are expected to occur.
However, growth driven economies in Middle East and North Africa are expected to continue to focus on strengthening their infrastructure and diversify their traditional revenue streams, resulting in good opportunities for the Company. Amidst this backdrop, the Company, backed by its financial strength, all round capabilities and technical skills, is well positioned to take advantage of business opportunities, both present and emerging. The company continues to focus on profitable execution of its robust order book, positioning well for emerging opportunities and is confident of pursuing its growth plans, with the aim of maximizing shareholder returns (RoE) on a sustainable basis.
As per the company, a total opportunity of Rs 90000-100000 crore for FY20 divided in sectors: Infrastructure – Rs 40000 crore, Power generation & Distribution Rs 15000 crore, Hydrocarbon Rs 25000 crore is awaited.
L&T has consistently been delivering in terms of bagging orders, strong execution of backlog and at the same time improving the quality of its balance sheet thereby generating reasonable cash flows. Strong business performance along with improvement in return ratios should rerate the stock.
Conclusion-: L&T is considered as one of the most stable companies in the Indian Stock Market. L&T is present across both the Major Indian Indices Sensex and Nifty 50 with 4% and 3.30% Weightage approximately. Apart from that most of the Mutual Funds as well as Pms Schemes also do hold L&T in their portfolio. Chances are it may go down another 10-15% depending upon the market conditions but these are the kind of stocks which are worth Exploring on Dips.
Currently L&T trades near its 52 week Low.
For Instance ICICI Bank was down to 168 Rs and currently it has made a high of 550 Rs up approx 200%. The same goes for Axis Bank, SBI, Tata Steel.
Thinking of buying Large Cap stocks , difficult times present the best opportunities to buy such stocks but don’t rush to buy them immediately.
