MOSL: LARSEN & TOUBRO (Buy)-A deep dive into subsidiaries’ annual reports; Investment in subsidiaries

LARSEN & TOUBRO: A deep dive into subsidiaries’ annual reports; Investment in subsidiaries/JVs rises 10% YoY to INR232b

(LT IN, Mkt Cap USD26.6b, CMP INR1324, TP INR1560, 18% Upside, Buy)

We delved into Larsen & Toubro’s (LT) subsidiaries’ annual reports. Key highlights of our analysis:

• Investments (incl. L&A) in subsidiaries/JVs rise 10% YoY to INR232b (39% of capital employed). This was primarily driven by the INR20b of additional investment by LT into L&T Finance Holdings, taking its investments to INR35b. Other major changes in FY18 are: a) LT invested INR5b into L&T Special Steel and Forgings taking its total investments to INR9b, b) LT invested INR7b into L&T Shipbuilding taking its total investments to INR31b, c) LT invested an additional INR2b into Hyderabad Metro increasing its investment to INR22b in FY18. With fresh investments being restricted and the company focusing on divestment of non-core assets, we expect incremental investments only for Hyderabad Metro, and to fund losses in L&T Shipbuilding and Special Steel and Forgings.
• Katupalli Yard continues to book losses on underutilized capacity. Lack of large defense orders and the resultant underutilization has led to another year of losses, which stood at INR4.4b in FY18 (down from INR5.9b in FY17, which included an INR2b write down on inventory).  Delays in order finalizations continued in FY18 along with extension of RFI/RFP for Warships, pollution control vessel for the coast guard and Landing Platform Docks.