MOSL: LARSEN & TOUBRO | Annual Report (Buy)-Deep dive into subsidiary annual reports-Investments into subsidiaries/JVs curtailed

​LARSEN & TOUBRO | Annual Report: Deep dive into subsidiary annual reports; Investments into subsidiaries/JVs curtailed

(LT IN, Mkt Cap USD25.0b, CMP INR1144, TP INR1340, 17% Upside, Buy)

We pored over ~4,600 pages of Larsen & Toubro’s (LT) subsidiary annual reports. Key highlights of our analysis:

Investments in subsidiaries/JVs were contained at INR197b (+3% YoY, 35% of capital employed). This is in line with LT’s strategy to limit further investments in subsidiaries/JVs and make them self-funding. Some major changes were seen at the subsidiary level in FY17 – i) Hyderabad Metro was taken over by LT from IDPL for a consideration of INR21b. ii) LT took INR9.5b write-down in its investment in IDPL, iii) Hydrocarbon had INR2.6b of preference shares being issued by the parent during the year (see exhibits 15 and 16 for details).

Kattupalli Port demerged from L&T Shipbuilding in FY17. According to the company, the sale of the port to Adani Ports should be complete by 2QFY18 – an advance of INR14.3b was already received in 3QFY17. Ex-ports, the shipbuilding business reported a loss of INR5.9b – the yard is targeting a few large naval orders, which are expected to be finalized in FY18, and subsequently, improve profitability FY19 onward.

Performance of Heavy Steel & Forgings and MHPS TG JV was below par. FY17 was another weak year for the Heavy Steel and Forgings segment, with EBITDA/PAT loss of INR254m/INR2.5b, primarily due to low capacity utilization. Within the MHPS partnership, the boiler JV recorded PAT of INR2.2b, driven by a 46% rise in sales, but the TG JV reported a loss of INR60m at the PAT level (despite EBITDA coming in at INR1.95b, with a 22% margin, PBT positive). The boiler JV received an order for the 1.98GW NLC Ghatampur project, but no domestic orders were bagged by the TG JV. Export orders worth USD200m were won by the power JVs in FY17.