Larsen and Toubro Ltd – Building India via its engineering solutions

“Our Defense engineering business has signed a teaming agreement with Navantia Spain for the purpose of submission of a techno-commercial bid for the Indian Navy’s prestigious P75(I) submarine program. Our daily ridership in Hyderabad Metro crossed the 5-lakh mark on July 3, and as recently as yesterday, the metro ridership touched a record 536,000.”

– Mr. P. Ramakrishnan, Head – Investor Relations

Stock data

Ticker	LT
Exchange	BSE and NSE
Industry	Engineering – Turnkey Services

Price Performance:

Last 5 days	+0.81%
YTD	+28.22%
Last 1 year	+42.72%

Company description:

Larsen & Toubro Ltd is a multinational conglomerate which is primarily engaged in providing engineering, procurement and construction (EPC) solutions in key sectors such as Infrastructure, Hydrocarbon, Power, Process Industries and Defence, Information Technology and Financial Services in domestic and international markets.

Business segments

1. Infrastructure Segment:

It comprises engineering and construction of buildings and factories, transportation infra, heavy civil infra, power transmission & distribution, water & effluent treatment, smart world & communication projects and metallurgical & material handling systems. This is the core business of the company.

2. Hydrocarbon Segment:

It comprises complete EPC solutions for the global oil & gas industry from design through detailed engineering, fabrication, procurement, project management, construction, installation, and commissioning

3.  Power Segment:

It comprises turnkey solutions for coal-based and gas-based thermal power plants including power generation equipment with associated systems and/ or balance-of-plant packages.

4. Defence Engineering Segment:

This segment comprises design, development, serial production, and life-support of equipment, systems, and platforms for defense and aerospace sectors; and the design, construction, and repair/ refit of defense vessels. The company has been active in the defense and strategic sector since the mid-80s.

5. Heavy Engineering Segment:

This segment comprises the manufacture and supply of custom-designed, engineered critical equipment and systems for core sector industries like fertilizer, refinery, petrochemical, chemical, oil & gas & thermal & nuclear power. The company is amongst the top 3 players globally in the sector.

6. Others:

The other businesses include realty, manufacture, sale, marketing of industrial valves, construction equipment, rubber processing, etc. It also has a presence in the mining and aviation sectors. 

Service Business

1. Information Technology Segment:

This segment comprises IT and integrated engineering services to many customers across the globe.

The company’s IT business is divided between its 3 subsidiaries:

a. L&T Infotech Ltd

b. Mindtree Ltd 

c. L&T Technology Services Ltd. 

2. Financial Services Segment:

This business primarily comprises rural finance, housing finance, wholesale finance, mutual fund, and wealth management. The business is controlled by the company’s subsidiary L&T Finance Holdings Ltd.

3. Development Projects Segment:

It comprises the development, operation, and maintenance of basic infrastructure projects, toll and fare collection, power development, development and operation of port facilities, and providing related advisory services.

Costs FY23:

The Manufacturing, Construction and Operating expenses were up by 18% and staff costs by 25% in FY23 vs FY22. Strong execution momentum in Hydrocarbon, Hi-Tech Manufacturing and IT&TS was there in FY23.

Order Book:

As of FY23, the company has a record-high order book of ~Rs 4 trillion, with Rs 2 trillion in Order Inflow in FY23 (19% higher vs FY22). Out of these, 62% are Domestic, 16% from USA & Europe, 19% from middle east and 3% from ROW.

New Business Launched:

L&T EduTech – This offers EdTech products and solutions to educational institutions, skilling bodies, working professionals, students, etc.

L&T SuFin – A B2B E-Commerce online platform launched to enable sellers to expand their sales reach, and for buyers to find their required products and services seamlessly. [15]

Sale of Digital Business:

During FY22, the Company sold its digital transformation business, L&T NxT, to Mindtree Ltd, a subsidiary of the Company, for a consideration of Rs 198 crore. 

Amalgamation of Mindtree & LTI:

The Board of Mindtree Limited (MT) and Larsen & Toubro Infotech Limited (LTI) have approved the amalgamation of MT with LTI. The said scheme is subject to the approval of the Shareholders, creditors, applicable regulators, and NCLT. 

Sale of Electric & Automation Business:

In August 2020, the company sold its Electrical and automation business to Schneider Electric; a global player in energy management and automation, for 14,000 crores in an all-cash deal. The company recorded a net gain of ~8,100 crores (net of tax) on the conclusion of the divestment of the business. 

Focus:

L&T is targeting Group Revenues of Rs. 2.7 lakh crore and ROE of 18%+ by FY 2025-26.

Financials:

What we like:  

1. The company is present in Diverse Business Segments:: 

L&T operates across various sectors, including engineering, construction, infrastructure, technology, and financial services. This diversification can help the company mitigate risks associated with fluctuations in any particular sector. For instance, during economic downturns when construction projects might slow down, the company’s technology and IT services divisions can continue generating revenue.

2. Healthy order inflows which is expected to improve further:

The order book grew 14% YoY to INR 4,126 Bn, as domestic and international businesses grew. Order inflow jumped 57% YoY to INR 655 Bn in 1QFY24, aided by the infrastructure projects segment. One can expect the order book and inflows to improve as the company has strong order prospects in the pipeline and keen to utilize the opportunities to sustain its growth momentum.

3. Ability to execute Complex and Large-Scale Projects:

L&T’s ability to manage and deliver complex, large-scale projects such as metro systems, power plants, and infrastructure projects showcases its technical competence and project management skills. These types of projects often require significant resources and expertise, acting as a barrier for competitors.

4. Huge reward for shareholders as RoEs to improve: 

The board has approved a share buyback of INR 100 Bn through the tender route and a special dividend of INR 8.4bn. This will likely help the company achieve its strategic target of 18% RoE by FY26. 

Factors to consider:

1. Slowdown in hydrocarbon capital expenditure due to any fluctuation in crude oil prices might affect the bottomline.
2. The company inherits a risk of slowdown in government capex due to upcoming general elections.
3. Infrastructure projects often face regulatory hurdles and political uncertainties. Changes in government policies and regulations can impact the company’s operations and profitability.