Investment Management
Assignment
Company- Larsen & Toubro Limited
Submitted To-
Submitted By-
Dr. Suveera Gill
Piyush Kumar Yadav
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Piyush Kumar Yadav
Table of Contents
1. Executive Summary
Larsen & Toubro Ltd.
Industry- Infrastructure
3
3
4
2. Classification of Firm
5
3. Revenue and EPS
6
4. Annual growth Rate of EPS and DPS
7
5. Payout Ratio
7
6. Capital Structure
L&T Ltd.
Comparison with the Competitors
8
8
8
7. Debt-Equity Ratio
9
8. Ranking based on
Use of Debt financing
Profitability
P/E ratio
Price/Sales
10
10
10
11
11
9. P/E ratio analysis
12
10. DuPont Analysis
12
11. Risk Associated with the Company
The Company’s Geographical Location
Its Product Line
Its Use of Debt Financing
Foreign Competition
13
13
13
13
14
12. Calculation of Beta
14
13. Weighted Average Cost of Capital
Cost of Equity
Weightage of Debt and Equity
Cost of Debt
14
14
15
15
14. Holding Period Return
16
15. Portfolio
16
References
17
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Piyush Kumar Yadav
1. Executive Summary
Larsen & Toubro Ltd.
Larsen & Toubro Limited, commonly known as L&T Limited is an Indian multinational
conglomerate company headquartered in Mumbai, Maharashtra, India.Larsen &
Toubro is a major technology, engineering, construction, manufacturing and financial
services conglomerate, with global operations. L&T addresses critical needs in key
sectors - Hydrocarbon, Infrastructure, Power, Process Industries and Defence - for
customers in over 30 countries around the world.
Larsen & Toubro originated from a company founded in 1938 in Mumbai by two
Danish engineers, Henning Holck-Larsen and Søren Kristian Toubro. As at March
31, 2018, L&T Group comprises 93 subsidiaries, 8 associates, 34 joint-venture and
33 joint operations companies.
The equity shares of the company are listed on the Bombay Stock Exchange (BSE)
and the National Stock Exchange of India (NSE). The company's shares constitute a
part of BSE 30 Index of the BSE Limited as well as NIFTY Index of the NSE.
During the year 2018-2019, the Company allotted 13,59,929 equity shares of Rs 2
each upon exercise of stock options by the eligible employees under the Employee
Stock Option Schemes. The Company repaid long-term borrowings of USD 233
million (approx. R 1610 crore including secured debentures of R 400 crore) during
this year on scheduled due dates. On the other hand, the Company raised USD 100
million of foreign currency borrowings and Rs 90 Crore of Rupee Term Loan as fresh
unsecured long-term borrowings for meeting business requirements and certain
capital expenditure.
The total income for the financial year 2018-2019 was Rs 89,757 crore as against Rs
76,224 crore for the previous financial year registering an increase of 18%. The profit
before tax from continuing operations including exceptional items was Rs 9,218
crore for the financial year under review as against Rs 7,262 crore for the previous
financial year, registering an increase of 27%. The profit after tax from continuing
operations including exceptional items was Rs 6,678 crore for the financial year
2018-2019 as against Rs 5,387 crore for the previous financial year, registering an
increase of 24%.
As at 31st March 2019 the gross property, plant and equipment, investment property
and other intangible assets including leased assets, stood at Rs 12,174.29 crore and
the net property, plant and equipment, investment property and other intangible
assets, including leased assets, at Rs 7,934.32 crore. Capital Expenditure during the
year amounted to Rs 1,571.41 crore.
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Industry- Infrastructure
Infrastructure is the fundamental facilities and systems serving a country, city, or
other areas, including the services and facilities necessary for its economy to
function. Infrastructure is composed of public and private physical improvements
such as roads, railways, bridges, tunnels, water supply, sewers, electrical grids, and
telecommunications (including Internet connectivity and broadband speeds). In
general, it has also been defined as "the physical components of interrelated
systems providing commodities and services essential to enable, sustain, or
enhance societal living conditions.''
Foreign Direct Investment (FDI) received in Construction Development sector
(townships, housing, built up infrastructure and construction development projects)
from April 2000 to March 2019 stood at US$ 25.05 billion, according to the
Department of Industrial Policy and Promotion (DIPP). The logistics sector in India is
growing at a CAGR of 10.5 per cent annually and is expected to reach US$ 215
billion in 2020.
India has a requirement of investment worth Rs 50 trillion (US$ 777.73 billion) in
infrastructure by 2022 to have sustainable development in the country. India is
witnessing significant interest from international investors in the infrastructure space.
Some key investments in the sector are listed below.
● In 2018, infrastructure sector in India witnessed private equity and venture
capital investments worth US$ 1.97 billion.
● In June 2018, the Asian Infrastructure Investment Bank (AIIB) has announced
US$ 200 million investment into the National Investment & Infrastructure Fund
(NIIF).
● Indian infrastructure sector witnessed 91 M&A deals worth US$ 5.4 billion in
2017
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2. Classification of Firm
Infrastructure industry is cyclical in nature.
Cyclical industries are sensitive to business cycles, so downturns in the cycle force
consumers to prioritize expenses and potentially pare some costs that are not
essential. Therefore, industries that focus on nonessential products face the biggest
risk of revenue loss when economic contraction takes hold.
Although infrastructure is important for the growth of a country, region, or area but it
is not essential, in other words, a consumer will satisfy its infrastructure needs only
after fulfilling his or her essential need such as consumer staples. In the time of
recession in the market, these non-essential firms suffer most and to survive they
have to cut employees and operations and therefore profit is also reduced.
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3. Revenue and EPS
For the last 5 years, Revenue and Earnings Per Share for L&T Ltd. is given belowYEAR
REVENUE(Cr.)
EPS
2014-2015
59300.78
54.46
2015-2016
66153.69
53.71
2016-2017
68273.2
58.49
2017-2018
76224.32
38.47
2018-2019
89756.7
47.63
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4. Annual growth Rate of EPS and DPS
𝐺𝑟𝑜𝑤𝑡ℎ 𝑅𝑎𝑡𝑒 = (𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 𝑣𝑎𝑙𝑢𝑒/ 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟 𝑉𝑎𝑙𝑢𝑒) − 1
Year on year growth rate of EPS and DPS is calculated and are as belowYEAR
EPS
EPS Growth rate
DPS
DPS growth rate
2014-2015
54.46
-
18
-
2015-2016
53.71
-1.38%
16
-11.11%
2016-2017
58.49
8.90%
21
31.25%
2017-2018
38.47
-34.23%
18.25
-13.10%
2018-2019
47.63
23.81%
16.25
-10.96%
5. Payout Ratio
𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 = 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒/ 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
Payout ratio for L&T Ltd. is YEAR
Payout ratio
2014-2015
33.05%
2015-2016
29.79%
2016-2017
35.90%
2017-2018
47.44%
2018-2019
34.12%
The historical payout ratio is 36.06%, which is calculated by taking the average of
the last 5 year’s payout ratios.
And, the current payout ratio is 34.12%.
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6. Capital Structure
L&T Ltd.
Financing
L&T Ltd.
Short term debt
3668.25
Long term debt
2391.87
Equity
52550.72
Current maturities of LTD
4131.45
Total Assets
125725.69
Debt/Assets ratio
1.90%
L&T Ltd. mainly relies on equity financing as its debt/equity ratio is 0.19.
It's only 1.9% of total assets are financed by debt, this means that the company
needs very less amount to pay the interest associated with the debt, therefore it
decreases the overall fixed cost to the company.
Every company tries to reach the balanced financial leverage depending upon its
own risk and reward criteria, and in this criteria the cost of debt and cost of equity
plays an important role.
Here, for L&T Ltd. cost of debt is 2.24% and cost of equity is 6.95%.
As it’s short term debt is more than long term debt, it implies that the company is
focused to finance its operating activities from the borrowing not the assets because
it belongs to an industry of cyclical nature and when the market downturns, L&T Ltd.
just have to stop borrowing in short duration and in this way they have lesser fixed
cost to bear (only the fixed cost associated with the long-term debt).
Comparison with the Competitors
Financing
L&T Ltd.
GMR infra
Ircon
International
Techno
Electric
Adani ports
ABB India
Short term
3668.25
943.55
0
20.62
6,188.12
203.1
Long term
2391.87
5,293.93
2,560.00
0
19,883.32
658.7
Equity
52550.72
11,701.15
3,949.54
1,381.83
24,748.14
1,453.4
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7. Debt-Equity Ratio
5 year high = 0.33 (2014-2015)
5-year low = 0.19 (2018-2019)
YEAR
L&T Ltd.
GMR infra
Ircon
International
Adani
Ports
ABB India
Techno
Electric
2014-2015
0.33
0.42
0
0.88
0.13
0.56
2015-2016
0.30
0.58
0
0.99
0.2
0.46
2016-2017
0.21
0.8
0
1.15
0.18
0.32
2017-2018
0.20
0.35
0.85
1.07
0
0.02
2018-2019
0.19
0.53
0.65
1.19
0
0.01
(DEBT-EQUITY RATIO)
From the chart, the debt-equity ratio of L&T Ltd. shows maximum stability among its
competitors.
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8. Ranking based on
Use of Debt financing
Debt-Equity ratio of industry = 0.4283
Here, debt-equity ratio of industry is calculated by taking the average of debt-equity
ratio of all the 6 companies.
In general, a company with a high D/E ratio is viewed as a higher risk to lenders and
investors because it suggests that the company has financed a larger amount of its
growth through borrowing. What is considered a high ratio can depend on a variety
of factors, including the company's industry.
Keeping in mind the debt-equity ratio of the industry, the ranking of companies based
on debt financing isCOMPANY
D/E ratio
GMR infra
0.53
Ircon International
0.65
L&T Ltd.
0.19
Techno Electric
0.01
ABB India
0
Adani Ports
1.19
Profitability
Profitability can be measured by various ratios, such as return on assets, return on
equity, net profit margin, etc.
Here, I have used return on capital invested (ROCE) because in this case it will give
the true picture of profitability as the companies are using different combinations of
debt and equity.
COMPANY
ROCE
L&T Ltd.
18.71%
Techno Electric
16.75%
Adani Ports
13.25%
ABB India
11.10%
Ircon International
8.28%
GMR infra
1.53%
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P/E ratio
Industry P/E Ratio = 31.32
If the P/E ratio of the company is greater than the industry then the stock is
overvalued and vice-versa.
COMPANY
P/E ratio
Ircon International
8.39
Techno Electric
16.54
Adani Ports
19.04
L&T Ltd.
23.75
ABB India
157.25
GMR infra
-
Price/Sales ratio
The ratio shows how much investors are willing to pay per dollar of sales. A low ratio
may indicate the stock is undervalued, while a ratio that is significantly above the
average may suggest overvaluation.
Price to sales ratio of industry = 3.51
COMPANY
P/Sales
Ircon International
0.79
GMR infra
1.42
L&T Ltd.
1.49
Techno Electric
3.21
ABB India
6.58
Adani Ports
7.58
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9. P/E ratio analysis
P/E ratio
L&T Ltd.
23.75
Industry (Infrastructure)
31.32
If the P/E ratio of the company is greater than the industry then the stock is
overvalued and vice-versa.
Here P/E ratio of L&T Ltd. is lower than the P/E ratio of the industry, this implies that
the L&T Ltd. is undervalued in the market.
10. DuPont Analysis
YEAR
Sales
EBIT
Total
Assets
Interest
Expense
Common
Equity
Income
Tax
Net Before
Tax
2014-2015
57017.41
5282.19
86903.76
1419.03
37084.58
1645.04
6701.22
2015-2016
63812.65
4778.8
99620.95
1476.82
42135.31
1256.04
6255.62
2016-2017
66301.35
5439.81
102196.82
1318.03
46012.74
1304.1
6757.84
2017-2018
74611.65
5830.15
115606.68
1432.23
49174.25
1875.08
7262.38
2018-2019
86987.86
7576.78
125725.69
1641.39
52550.72
2540.47
9218.17
ROE =
[(Operating Profit Margin * Total Asset Turnover) - Interest Expense Rate]
* Financial Leverage Multiplier * Tax Retention Rate
Year
Operating
Profit
Margin
Total Asset
Turnover
Interest
Expense
Rate
Financial
Leverage
Multiplier
Tax
Retention
Rate
ROE
2014-2015
0.09
0.66
0.02
2.34
0.75
7.86%
2015-2016
0.07
0.64
0.01
2.36
0.80
6.26%
2016-2017
0.08
0.65
0.01
2.22
0.81
7.23%
2017-2018
0.08
0.65
0.01
2.35
0.74
6.63%
2018-2019
0.09
0.69
0.01
2.39
0.72
8.18%
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11. Risk Associated with the Company
The Company’s Geographical Location
Larsen & Toubro Ltd. is a multinational company head-quartered in Mumbai,
Maharashtra. It is currently operating in 38 countries. Every country has its own tax
system and if a company is profitable in one tax condition does not imply that it will
be profitable in others too.
Even if it is profitable in every country but it prone to risk associated to tax changes
by the regulatory body of the concern country.
Its Product Line
L&T Group comprises 93 subsidiaries, 8 associates, 34 joint-venture and 33 joint
operations companies.In January 2011, the Chairman announced that the company
would be restructured into nine independent virtual companies. The original nine
virtual companies which operated in different segments, were subsequently
increased to 12, and they are:
1. Building and Factories
2. Transportation & Infrastructure
3. Metallurgical & Material Handling
4. Heavy Civil Engineering
5. Engineering Services
6. Power Transmission and Distribution
7. Power
8. Water
9. Geo-Structure
10. Smart World & Communication
11. Infotech
12. Finance
13. Hydrocarbons and Chemicals
As its product line is diversified, the major problem occurs when all the associated
industries suffers a downturn.
Its Use of Debt Financing
L&T Ltd. uses debt to finance its operating activities not for assets. It means that it
L&T Ltd. has operating leverage but not financial leverage. When market expands
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Piyush Kumar Yadav
financial leverage has a huge impact on the profits so, the competitors with high
financial leverage will have higher profits than L&T Ltd.
Foreign Competition
Currently in India, there are not many foreign companies in infrastructure industry
and among it’s Indian competitors, the financial performance of L&T Ltd. is much
better. But when foreigh competitors will arrive, there is a chance that their image will
be better than the L&T Ltd. and it will reflect in the financial performance.
12. Calculation of Beta
For calculation of Beta, I used the ‘slope’ function in excel. For this analysis I
gathered two data1. Weekly adjusted closing price of L&T Ltd. for last 5 years.
2. Weekly adjusted closing price of Nifty 50 for last 5 years.
Beta for L&T Ltd. = 0.148
13. Weighted Average Cost of Capital
wacc = cost of equity * weightage of equity + cost of debt * weightage of debt
Cost of Equity
Cost of equity is calculated by CAPM model.
Cost of equity = r(f) + b(r(m) - r(f))
Here,
r(f) is risk-free rate of return. I have used return of 10 year government bonds
(6.73%) as risk-free rate of return.
r(m) is the rate of return of the market. Its calculation involve following steps1. Gathered the data of weekly adjusted closing price of NIFTY 50 for last 5
years.
2. Calculated the weekly market return by
Market return = (current week- previous week)/previous week
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3. Calculated the average weekly market return
4. Calculated the annualized market return byAnnualized market return = 52 * avg weekly market return
b is beta of the company, here it is 0.148.
cost of equity = 6.95%
Weightage of Debt and Equity
Weightage of debt and equity is calculated by Debt-Equity ratio (0.19).
weightage of debt = 0.19
weightage of equity = 0.71
Cost of Debt
Cost of debt is calculated by dividing the ‘interest expenses’ by ‘total debt’.
Cost of debt = 2.24%
As debt financing has tax-shield, and L&T Ltd. comes in the bracket of 29% tax.
Cost of debt = 2.24%(1 - 0.29) = 1.59%
Finally, weighted average cost of capital -
wacc = 5.934%
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14. Holding Period Return
End value of investment
HPR =
Beginning value of investment
Date
Price
02/04/2014
866.97
01/04/2019
1412.2
HPR = 1.63
Annual HPR = 1.10
15. Portfolio
Date
Adani Ports
ABB India
L&T Ltd
GMR
Infrastructure
Total
02/04/2014
186.3
849.35
866.97
21.89
1924.51
01/04/2019
383.05
1317.8
1412.2
19.5
3132.55
Return
196.75
468.45
545.23
-2.39
1208.04
First of all, I bought one share each of all the four companies (remaining two were
not listed five years back) in 2014 and my total investment was Rs 1924.51.
After 5 years, i get return of Rs 1208.04.
Now, if I had invested the same amount (Rs 1924.51) only in L&T Ltd. then I had
bought 2.22 shares and after 5 years my return would be Rs 1210.31.
It is clear that I would have more appreciated return if I had invested in the single
company instead of the portfolio.
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References
1.
2.
3.
4.
L&T Ltd annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016, 2014-2015
ABB India annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016, 2014-2015
Adani ports annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016, 2014-2015
GMR infrastructure annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016,
2014-2015
5. Ircon international annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016,
2014-2015
6. Techno electric annual report 2018-2019, 2017-2018, 2016-2017, 2015-2016,
2014-2015
7. moneycontrol.com
8. morningstar.com
9. investopedia.com
10. https://www.accountingtools.com/articles/how-does-capital-structure-analysis-work.ht
ml
11. https://www.ibef.org/industry/infrastructure-sector-india/infographic
12. www.icra.in
13. https://tradingeconomics.com/india/government-bond-yield
14. wikipedia.org
15. Principles of managerial finance, 13th edition, by Lawrence J. Gitman and Chad J.
Zutter
16. Analysis of investments & management of portfolios, 10th edition, by Frank K. Reilly
and Keith C. Brown
17