About Company:

Larsen & Toubro Limited, commonly known as L&T Limited is an Indian multinational conglomerate company leading in nearly every sphere of business it operates in. It serves customers in more than 30 countries, across various industries.

L&T has a highly diversified business and operates in the following segments (% of Revenue) –

Infrastructure (47%)

Hydrocarbon (12%)

Power (2%)

Defence Engineering (3%)

Heavy Engineering (2%)

Services (30%)

Others (4%)

L&T has been involved in the construction of some of the most prestigious projects in India like Statue of unity, Mumbai International airport, Hyderabad Metro, Wankhede Stadium and even a Nuclear plant in Gujarat. It has also completed iconic projects in international markets like Twin Towers in Dubai, Petronas Refinery in Malaysia and World’s Longest Conveyor in Bangladesh among others. This alone reflects the prestige L&T enjoys in domestic as well as international markets.

L&T has seen strong growth in revenue across all segments over the years (except Power). In 9MFY20, L&T had revenue of more than Rs.1 lakh crore. It derives 66% of its revenue from domestic sales while the Middle east and US & Europe form the rest of the pie. Domestic sales have slowed down in recent quarters and with it, the share of Infrastructure segment as well. Company has a history of strong execution and consequently, this has led to a strong order book. It has an order book of mind-boggling Rs.3 lakh crore. Such a big order book gives visibility of earnings to the company in years to come. Around 73% of the order book is from Infra segment while 15% is from hydrocarbon. For 9MFY20, order inflows grew 11% YoY to Rs.1.2 lakh crore. 66% of the total inflows were domestic while 14% were from Middle east – largely attributed to L&T’s Saudi Aramco project.

Opportunities:

L&T derives 70% of its order book from the public sector. So revenue and earnings growth for the company largely depends on government spending.

NDA government envisages $1.5 trillion investment in infrastructure over the next 5 years. Many big infrastructure projects will get a boost like Metro Rail, road development, bullet train, Railway Capex, Defence procurement Bharatmala Pariyojana, SagarMala etc. L&T being the largest developer in the country is likely to be a major beneficiary of the same.

Defence capex has been increasing and Rs1.8 lakh crore of approved weapon acquisitions have been reserved for domestic vendors including PSUs. With 40-60% indigenous content requirement, it provides private players a business opportunity worth Rs.310- 470 bn. L&T has already won a mega order from Indian Navy in FY19.

Metro rail projects worth over Rs 2.5 lakh crore are underway in India and this pile will probably grow in the coming years. L&T is already working on the Hyderabad metro project and can continue to benefit from this segment.

2,000 kms of coastal connectivity roads have been identified for construction and development. The Airports Authority of India aims to bring around 250 airports under operation across the country by 2020.

Besides Centre, Tamil Nadu and Rajasthan are the other large spenders on overall infrastructure and are also growing at a higher rate of 22-28%.

International markets showing strong traction in Refineries space have driven growth in inflows (78%) and order book (61%) in FY19. Global competence and cost efficiencies improved margin for the segment from 21% to 24.5% YoY in FY19.

L&T acquired a majority stake in Mindtree. Currently, L&T offers IT services through L&T Infotech & L&T Technology services. With this acquisition, there would be limited client overlap, a significant boost to L&T Group’s Hi-tech, Retail and Travel verticals.

But despite such performances and characteristics, L&T has been feeling the heat of slowdown. Order inflow growth has been slower in recent quarters. Infrastructure spending and projects awarding growth has drastically reduced since FY17 from both Centre and State. With current COVID issues, public capex slowdown is imminent on fiscal deficit worries.

Oil prices have crashed which would adversely affect the Middle East. Middle East forms a big part of revenues and international orders form ~50% of the order book for the hydrocarbon segment. Current Oil prices can collapse these economies which would be worrisome for L&T.

Despite the grim situation, L&T is at the forefront to navigate tough waters. It has maintained a strong balance sheet and has low standalone Debt/Equity ratio. It has exited non-core businesses over the past few years and reduced working capital requirements.

Final Thoughts:

L&T has proved time and time again that it has superior execution skills and global expertise. It has continuously worked on improving efficiencies but current situation has created a lot of uncertainties. Its huge order book allows good breathing space and would be a key beneficiary as soon as economies start reviving. An investor ready to bear the short-term pain has a good long-term opportunity as L&T is trading at historical 5-year low PE valuation.

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