Larsen & Toubro - Analyzing 2,564 pages of subsidiary accounts - Motilal Oswal

Tale of half full or half empty

- Investment in subsidiaries was curtailed at INR14b in FY13, vs INR21b YoY; and we expect the quantum to increase to INR27b / INR23b in FY14 / FY15 respectively. Lower investments in FY13 was supported by i) Net funding of just INR7.6b in Infra concession (adjusted for INR1.8b of NCDs) vs average INR19b each in FY11/FY12 given the debt drawal schedules, limited progress on large projects, etc ii) INR3.7b in property development vs INR10.4b in FY12; as Seawoods raised debt of INR6b.

- Reported profits by subsidiaries was largely stable at INR6.8b in FY13 (vs INR6.3b in FY12) and is being supported by service businesses (IT and Finance). Net loss in asset development increased to INR5.2b in FY13, vs INR3.1b in FY12 and is impacted by i) poor toll collections for recently commissioned projects at just 5-6% of the project cost ii) provision for diminution in investments etc of INR1.4b in property development business. Power BTG reported profits of INR520, but was supported by gains on embedded derivatives / provision write backs of INR1.1b.

- For L&T, subsidiaries are expected to contribute 45% of the net worth and 37% of Capital Employed, but just 5% of the consolidated profits in FY14. L&T's consolidated RoE has deteriorated significantly from 31% in FY07 to 16% in FY13. Correcting the capital structure and improving RoEs are important medium term stock triggers. Manufacturing business (BTG, ship building, forgings) provides interesting long term opportunities.

- We are cutting estimates 9%/4% respectively for FY14/15 to factor in constrained revenues for toll road projects, manufacturing businesses, etc. Maintain Buy, with revised SOTP based price target of INR1,000/sh. L&T remains amongst our top picks in Indian Capital goods sector.

Source : Equity Bulls

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