• The Engineering sector is the largest in the overall industrial sectors in India.
• It is a diverse industry with a number of segments, and can be broadly categorized into two
segments, namely, heavy engineering and light engineering.
• Approximately 15-20 %growth rate in industry expected (LNT growing @ 25%)
• Most of the leading players are engaged in the production of heavy engineering goods and
mainly produces high-value products using high-end technology. Requirement of high level
of capital investment poses as a major entry barrier.
• Leading players in this industry are L&T, ABB, BHEL, Siemens, Thermax, Crompton
• The light engineering goods segment, on the other hand, uses medium to low-end
technology. Entry barrier is low on account of the comparatively lower requirement of
capital and technology.
• The demand in the engineering sector to remain to be healthy primarily on account of the
Government’s increased thrust on infrastructure development.
• Industry margins growing @ 12-15%
• Industry profitability approximately 10-14%
• Larsen & Toubro Limited (L&T) is a technology, engineering, power, construction and
• It is one of the largest and most respected companies in India's private sector with a strong
revenue growth of 25% and order inflow growth of 15-20% in FY2012.
• Leadership position in all its major lines of business.
• L&T has an international presence, with a global spread of offices and factories. Has strong
footprint in the Gulf and in China.
• Larsen & Toubro Komatsu Limited
• Larsen & Toubro Finance
• Larsen & Toubro Infrastructure Finance
• L&T – Integrated Engineering Services (IES)
• Larsen & Toubro Valves Business Group
Firm's competitive position:
• Impact on margins:
• EBITDA margin stable at 15.2% and strong inflows of Rs 303 bn.
• Capital Investment Requirement:
• L&T reported a strong balance sheet at the end FY 2011 with a marginal deterioration in working
capita levels & gross debt to equity of 0.33X.
• L&T increased its investments in its subsidiaries and associates by 29.6bn to 106.4 bn at end
FY2011 from FY2010-end level of Rs. 77bn primarily led by(1) buy out of PE stake in L&T
IDPL and investment in other development projects of Rs. 10.7 bn
• (2) Increase in investment in L&T finance and L&T infrastructure finance by Rs. 6.8 bn. (3)
Increase in investment in L&T power development to the tune of about Rs. 4.6 bn.
• Growth Rates:
• Management guided for strong revenue (25%) and inflows (15-20%) growth in FY2012 end.
• Our estimates build a marginal order inflow growth of 3% and strong revenue growth of 24% for
Cost of Equity Using CAPM Model
Rf 8.24% 10 year Benchmark Gsec Yield
Rm 15% Expected Market Return
R Equity 15.76%
10 Year Benchmark G Sec Yield 8.24%
AAA Corporate Bond Spread 1.23%
Tax Rate 30.00%
Total Debt (2011) 83241.2
Total Equity (2011) 10,56,970 Market Capitalisation as on 24th June
• Terminal Value at the end of FY 2016
• Assumption: Free cash flow growth falls to 10% after 2016 and remains constant thereafter
• G FCF 10%
• R WACC 15.10%
• Terminal Value (Rs. Mn) 24,60,286
• Enterprise Value (Rs Mn) 15,43,718
• Value of Equity (Rs. Mn.) 14,60,710
• Estimated Price (Rs) 2,413.60