India Larsen & Toubro

1 Please see Disclaimer for analyst certifications and all other important disclosures. Infrastructure Ashish Shah research Analyst, Infrastructure +91-22-4215 9021 Vaibhav Shah research Associate, Infrastructure +91-22-4215 9815 Institutional research Result Update India I Infrastructure 29 January, 2022 BUY Price: Rs1,898 Target Price: Rs2,200 Forecast return: 16% Larsen & Toubro Miss on earnings but expect catch up in Q4 Financial and valuation summary L&T s Q3FY22 PAT was below estimate due to weak E&C margins and lower other income. PAT declined YoY to (estimate: ). PY base included gain of on sale of commercial real estate ( YoY decline in PAT on adjusted basis).

2 Revenue/EBITDA grew 11%/6% YoY to Rs396 , with EBITDA margin declining 50bp YoY to E&C revenue grew YoY to Rs272bn (estimate: Rs279bn) and EBITDA margin fell 170bp YoY to (estimate: ). Order inflows at Rs504bn beat estimate of Rs460bn due to higher Hydrocarbon inflows. L&T maintained guidance on all parameters implying strong Q4 performance. Monetization of Nabha power is on track while L&T also completed debt refinancing in Hyderabad Metro. E&C valuations at FY23/24E are reasonable. BUY with a PT of Rs2200. E&C results weak due to lower execution in Hydrocarbons/low margin in Infrastructure E&C performance was below estimate led by lower than expected execution in Hydrocarbons and lower margins in Infrastructure verticals.

3 Revenue growth was led by Infrastructure (up 16% YoY) and Hydrocarbons (up 11% YoY). E&C margin contraction was led by Hydrocarbons (down 260bp YoY to ) and Heavy Engineering (down 440bp YoY to ). Infrastructure margins improved 90bps YoY to Strong order inflows led by Hydrocarbons; order prospects buoyant at Consolidated order inflows declined 31% YoY to Rs504bn (estimate: Rs460bn) on high base (PY includes HSR orders of Rs350bn). E&C inflows declined 39% YoY to Rs380bn (estimate: Rs335bn). Order prospects for Q4FY22 are up 48% YoY at (Domestic: , international: Rs890bn) driven by Infrastructure ( ). Mix of domestic order backlog of : Center (10%), States (29%), PSUs (44%), and Private (16%).

4 Guidance maintained on all fronts; monetization of development assets in progress L&T has maintained its FY22 guidance of low to mid-teen growth in revenue and order inflow (implies Q4 inflow of Rs740bn at lower end of guidance; 9M inflow at ). L&T is confident of keeping E&C margins flat YoY at in FY22 (9M: ) supported by i) projects crossing margin recognition threshold, ii) release of contingencies, iii) operating leverage due to stronger execution and iv) favourable claim settlements. It is working towards divestment of development assets by selling Nabha Power Plant and sell balance 51% stake in IDPL. Also, L&T refinanced term loan of Rs130bn in Hyderabad Metro by NCDs/CPs thereby saving annually in interest costs starting Jan-22.

5 It is also looking for third-party equity infusion in Hyderabad Metro and expects finalisation of support from Telangana government by Mar-22 (mostly soft/indirect financial support) which should limit/lower L&T s support beyond FY22. E&C business valuations remain reasonable; maintain BUY We expect 27% CAGR in consolidated EPS over FY22-24 with E&C business EPS growing at 21% CAGR over this period (E&C EPS: in FY23/24E). E&C business valuations at FY23/24E are reasonable, especially in light of a broader re-rating of cyclical stocks with a strong potential to rerate. We value E&C business at 20x average FY23-24 PAT (earlier 18x) and arrive at SOTP based TP of Rs2200.

6 Maintain Buy. Market data Bloomberg: LT IN 52 week H/L: 2,079/1,306 Market cap: Shares Outstanding: Free float: Avg. daily vol. 3mth: 2,548,633 Source: Bloomberg Changes in the report Rating: BUY; unchanged Target price: Rs2,200; unchanged EPS: FY22E: ; FY23E: ; + FY24E: ; + Source: Centrum Broking Shareholding pattern Dec-21 Sep-21 Jun-21 Mar-21 Promoter 0 0 0 0 FIIs 22 DIIs Public/other Source: BSE Centrum estimates vs actual results YE Mar (Rs mn) Centrum Q3FY22 Actual Q3FY22 Variance (%) Revenue 4,06,750 3,95,629 ( ) EBITDA 45,760 45,304 ( ) EBITDA margin PAT 22,505 20,547 ( ) Source: Company, Centrum Broking YE Mar (Rs mn) 3 QFY22A 3 QFY21A YoY (%) 2 QFY22A QoQ (%) FY22E FY23E FY24E Revenues 395,629 355,964 347,729 1,554,581 1,821,674 2,085,781 EBITDA 45,304 42,800 39,949 186,543 231,200 267,669 EBITDA margin (%) ( ) ( ) Adj.

7 Net profit 20,547 24,667 ( ) 17,225 86,135 116,815 139,358 Adj. EPS (Rs) ( ) EPS growth (%) PE (x) EV/EBITDA (x) PBV (x) RoE (%) RoCE (%) Source: Company, Centrum Broking Larsen & Toubro 29 January, 2022 Centrum Institutional research 2 Thesis Snapshot Estimate revision Valuations YE Mar (Rs mn) FY23E New FY23E Old % chg FY24E New FY24E Old % chg Net Sales 18,21,674 18,21,226 20,85,780 20,80,444 EBITDA 2,31,200 2,25,213 2,67,669 2,62,024 EBITDA margin % Adj. PAT 1,16,815 1,14,667 1,39,358 1,38,464 Diluted EPS Source: Centrum Broking Larsen & Toubro versus NIFTY 50 1m 6m 1 year LT IN ( ) NIFTY 50 ( ) Source: Bloomberg, NSE Key assumptions FY21A FY22E FY23E FY24E Consolidated order inflow growth (%) ( ) E&C order inflow (Rsbn) 1,327 1,449 1,601 1,753 E&C order inflow growth (%) ( ) E&C revenue growth (%) ( ) E&C EBITDA Margin (%) Effective tax rate (%) Standalone net wcap (days) 103 103 104 103 Standalone Capex (Rsmn) 10,288 10,000 15,000 16,000 Source.

8 Centrum Broking We value L&T on SOTP basis at Rs2,200, valuing the E&C business at 20x average PAT of FY23-24E. Other businesses have been valued at their respective market capitalization (at 20% holding company discount). Summary SOTP Businesses Value (Rs/share) E&C business 1,260 Listed Subsidiaries (IT and FS) 920 IDPL 20 Total of above 2,200 FY22E FY23E FY24E E&C EPS (Rs) Implied E&C P/E (x) P/E mean and standard deviation Source: Bloomberg, Centrum Broking Peer comparison Company Mkt Cap (Rsmn) EPS CAGR (FY22-24E) (%) PE (x) P/Bv (x) EV/EBITDA (x) RoE (%) FY22E FY23E FY24E FY22E FY23E FY24E FY22E FY23E FY24E FY22E Larsen & Toubro 26,66,960 BHEL* 2,01,263 NM NM NM NM KEC International 1,28,621 Kalpataru Power* 58,804 Source: Company, Centrum Broking.

9 *: Bloomberg Consensus estimatesLarsen & Toubro 29 January, 2022 Centrum Institutional research 3 Exhibit 1: Consolidated quarterly results Rsm 3Q21 4Q21 FY21 1Q22 2Q22 3Q22 FY22E Comments Net sales 3,55,964 4,80,879 13,59,790 2,93,347 3,47,729 3,95,629 15,54,580 EBIDTA 42,800 63,889 1,56,241 31,715 39,949 45,304 1,86,543 EBIDTA Margin (%) Margin contraction due to weaker E&C margins Other income 10,647 10,283 34,294 6,480 5,321 5,714 24,189 Depreciation 7,021 8,168 29,042 7,174 7,288 7,325 29,199 Interest 9,620 8,531 39,134 8,275 7,793 8,138 31,090 Rose QoQ as it includes write-off of unamortized borrowing costs of Rs600m on the original term loan in Hyderabad Metro PBT of continued operations 36,805 57,474 1,22,358 22,746 30,189 35,556 1,50,443 PBT of discontinued operations 2,555 (1,321)

10 26,445 - - - - Total PBT 39,360 56,152 1,48,803 22,746 30,189 35,556 1,50,443 Tax of continued operations 10,408 20,867 40,026 7,184 8,845 10,587 48,133 Tax of discontinued operations 461 (77) 25,526 - - - - Total Tax 10,869 20,790 65,552 7,184 8,845 10,587 48,133 Effective tax rate (%) PAT 28,491 35,362 83,251 15,562 21,344 24,969 1,02,310 Minority interest 3,910 4,029 12,770 3,572 4,125 4,624 17,375 Profit from associates 86 1,595 144 (245) 6 203 1,200 Consolidated PAT 24,667 32,928 70,625 11,744 17,225 20,547 86,135 Extra-ordinary items - - 45,204 - 969 - - Reported PAT 24,667 32,928 1,15,829 11,744 18,195 20,547 86,135 OPM (%) NPM (%) EPS (Rs) % change yoy Net sales ( ) ( ) EBIDTA ( ) Other income ( ) ( ) ( ) ( ) Interest Depreciation ( ) ( ) ( ) ( ) PBT ( ) ( ) Adj PAT ( ) ( ) Reported PAT ( ) ( ) ( ) Source: Company, Centrum Broking Exhibit 2.