FINANCIAL RATIO ANALYSIS OF LARSEN & TOUBRO LIMITEDINDUSTRY: ENGINEERING

Presented By:Jitendra Kumar

INDUSTRY OVERVIEW• 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..

• 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. Consequently, the small and unorganized firms have a small market presence.

• Leading players in this industry are L&T, ABB, BHEL, Siemens, Thermax, Crompton Greaves, Voltas

• 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.

COMPANY OVERVIEW• Larsen & Toubro Limited (L&T) is a technology, engineering,

power, construction and manufacturing company. • It is one of the largest and most respected companies in India's

private sector.   • 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.

Subsidiaries• Larsen & Toubro Komatsu Limited• Larsen & Toubro Finance• Larsen & Toubro Infrastructure Finance• L&T – Integrated Engineering Services (IES)• Larsen & Toubro Valves Business Group

   Year

Mar 10(12) 

Normalised (Mar 10)

Mar 09(12) 

Normalised (Mar 09)

Mar 08(12) 

Normalised (Mar 08)

  INCOME : Sales Turnover 37,330.51 96.22% 34,301.40 95.96% 25,314.69 96.35%

   Excise Duty 317.31 0.82% 393.31 1.10% 334.38 1.27%

  Net Sales 37,013.20 95.40% 33,908.09 94.85% 24,980.31 95.07%  Other Income 2,185.75 5.63% 1,734.13 4.85% 547.89 2.09%

 Stock Adjustments -402.54 -1.04% 105.11 0.29% 746.17 2.84%

   Total Income 38,796.41 100.00% 35,747.33 100.00% 26,274.37 100.00%  EXPENDITURE : Raw Materials 15,854.40 40.87% 16,177.17 45.25% 13,009.51 49.51%

  Power & Fuel Cost 365.36 0.94% 483.3 1.35% 365.25 1.39%

 Employee Cost 2,310.49 5.96% 1,918.00 5.37% 1,497.43 5.70%  Other Manufacturing Expenses 10,716.09 27.62% 8,836.89 24.72% 5,975.49 22.74%

 Selling and Administration Expenses 2,088.32 5.38% 1,941.26 5.43% 1,547.57 5.89%

  Miscellaneous Expenses 462.99 1.19% 943.18 2.64% 366.74 1.40%

 Less: Pre-operative Expenses Capitalised 36.25 0.09% 24.48 0.07% 11.42 0.04%

   Total Expenditure 31,761.40 81.87% 30,275.32 84.69% 22,750.57 86.59%

  Operating Profit 7,035.01 18.13% 5,472.01 15.31% 3,523.80 13.41%

  Interest 637.67 1.64% 477.68 1.34% 173.62 0.66%

  Gross Profit 6,397.34 16.49% 4,994.33 13.97% 3,350.18 12.75%

  Depreciation 383.65 0.99% 284.83 0.80% 195.94 0.75%

  Profit Before Tax 6,013.69 15.50% 4,709.50 13.17% 3,154.24 12.01%

  Tax 1,651.56 4.26% 1,217.60 3.41% 891.56 3.39% Fringe Benefit tax -10.01 -0.03% -0.2 0.00% 69.31 0.26%

  Deferred Tax -3.38 -0.01% 10.44 0.03% 19.95 0.08%

  Reported Net Profit 4,375.52 11.28% 3,481.66 9.74% 2,173.42 8.27%  Extraordinary Items 1,060.67 2.73% 850.25 2.38% 115.29 0.44%

  Adjusted Net Profit 3,314.85 8.54% 2,631.41 7.36% 2,058.13 7.83%

  Adjst. below Net Profit -0.35 0.00% -0.05 0.00% -0.11 0.00%

  P & L Balance brought forward 100.5 0.26% 104.31 0.29% 78.24 0.30%  Statutory Appropriations 0 0.00% 0 0.00% 0 0.00%

 Appropriations 4,368.38 11.26% 3,485.42 9.75% 2,147.24 8.17%

   P & L Balance carried down 107.29 0.28% 100.5 0.28% 104.31 0.40%  Dividend 752.75 1.94% 614.97 1.72% 495.32 1.89%

   Preference Dividend 0 0.00% 0 0.00% 0 0.00%

  Equity Dividend % 625 1.61% 525 1.47% 850 3.24%

   Earnings Per Share-Unit Curr 70.83 0.18% 57.71 0.16% 71.73 0.27%

  Earnings Per Share(Adj)-Unit Curr 0.00% 0.00% 0.00%

   Book Value-Unit Curr 303.28 0.78% 212.31 0.59% 325.95 1.24%

 http:/ / www.capitaline.com

SUMMARY PROFIT & LOSS ACCOUNT

SUMMARY BALANCE SHEET(Rs in Crs)

Year Mar 10 Normalised Mar 10 Mar 09 

Normalised Mar 09 Mar 08 

Normalised Mar 08

  SOURCES OF FUNDS : Share Capital 120.44 0.48% 117.14 0.62% 58.47 0.45%  Reserves Total 18,166.11 72.34% 12,342.55 64.91% 9,496.61 72.28%  Equity Share Warrants 0 0 0   Equity Application Money 25.09 0 0  Total Shareholders Funds 18,311.64 72.92% 12,459.69 65.52% 9,555.08 72.72%  Secured Loans 955.73 3.81% 1,102.38 5.80% 308.53 2.35% Unsecured Loans 5,845.10 23.28% 5,453.65 28.68% 3,275.42 24.93%   Total Debt 6,800.83 27.08% 6,556.03 34.48% 3,583.95 27.28%  Total Liabilities 25,112.47 100% 19,015.72 100.00% 13,139.03 100%   APPLICATION OF FUNDS :  Gross Block 7,290.09 27.77% 5,590.50 28.49% 4,205.75 31.05% Less : Accumulated Depreciation 1,788.53 6.81% 1,466.18 7.47% 1,279.58 9.45%   Less:Impairment of Assets 6.93 0.03% 6.93 0.04% 6.93 0.05% Net Block 5,494.63 20.93% 4,117.39 20.98% 2,919.24 21.55%   Lease Adjustment -3.07 -0.01% -3.07 -0.02% -3.07 -0.02% Capital Work in Progress 874.2 3.33% 1,080.28 5.51% 729.27 5.38%  Investments 13,705.35 52.20% 8,263.72 42.11% 6,922.26 51.11%  Current Assets, Loans & Advances Inventories 7,723.44 29.42% 5,805.05 29.58% 4,305.91 31.79%  Sundry Debtors 11,163.70 42.52% 9,903.13 50.47% 7,365.01 54.38% Cash and Bank 1,431.87 5.45% 775.29 3.95% 964.46 7.12%  Loans and Advances 6,042.60 23.02% 5,840.92 29.77% 3,771.40 27.84%  Total Current Assets 26,361.61 100.41% 22,324.39 113.77% 16,406.78 121.13%   Less : Current Liabilities and Provisions  Current Liabilities 19,054.50 72.58% 14,776.15 75.30% 11,741.72 86.69% Provisions 2,188.36 8.34% 1,942.63 9.90% 2,035.42 15.03%   Total Current Liabilities 21,242.86 80.91% 16,718.78 85.20% 13,777.14 101.72%  Net Current Assets 5,118.75 19.50% 5,605.61 28.57% 2,629.64 19.41%  Miscellaneous Expenses not written off 0 0.00% 0.26 0.00% 3.06 0.02%  Deferred Tax Assets 311.88 1.19% 386.69 1.97% 182.96 1.35%   Deferred Tax Liability 389.27 1.48% 435.16 2.22% 244.33 1.80%  Net Deferred Tax -77.39 -0.29% -48.47 -0.25% -61.37 -0.45%   Total Assets 25,112.47 95.65% 19,015.72 96.91% 13,139.03 97.01% Contingent Liabilities 1,141.10 4.35% 606.88 3.09% 405.35 2.99%Net Total Assets 26,253.57 100% 19,622.60 100.00% 13,544.38 100% http:/ / www.capitaline.com

COMPUTATION OF RATIOS (1/2)Ratios Mar-10 Mar-09 Mar-08ObservationsLeverage Ratios

Long Term Debt/ Equity 0.371 0.526 0.375

Debt equity ratio has remained constant except for the minor jump in 2008-09. Well within comfort range

Debt/ Equity 1.371 1.526 1.375

Debt equity ratio has remained constant except for the minor jump in 2008-09. Well within comfort range

Interest Coverage Ratio 11.03 11.46 20.3

Although the interest coverage ratio has fallen by 46% it is still extremely comfortable

DSCR 4.51 6.87 13.98Extremely high compared to industry norms

Turnover Ratios

Fixed Asset Turnover Ratio 5.21 6.36 6.019

The ratio is high by industry standards. However, after looking at the depreciation numbers it appears that the assets are growing old

Inventory Turnover Ratio 4.16 5.26 5.33

COMPUTATION OF RATIOS (2/2)

Ratios Mar-10 Mar-09 Mar-08ObservationsLiquidity Ratios

Current Ratio 1.24 1.34 1.19Meets lenders requirement

Acid Test Coverage Ratio 0.98 1.12 1.03Meets lenders requirement

Average Collection Period Ratio 102.99 91.87 53.18

This is a worrying trend. The sales collection number has almost doubled over the 3 years

Return Ratios

Gross Profit Margin 17.28 14.73 13.41Almost a 400% rise in gross profits

Net Profit Margin 11.82 10.27 8.7Very healthy rise in NPM

Return on Investment 26% 27% 25%

Return on Equity 23.90% 27.90% 22.70%

Very high return on investment. Justifies the premium valuation the company enjoys

Price To Earnings Ratio 27.65 34.65 56.25

OBSERVATIONS• Other income has jumped from 547 cr to 2185 cr• Interest cost has risen 268%• Dividend payout ratio has fallen 850% to 625%• Bonus shares issued in the ratio of 1 : 1 in 2008 – 2009• 115% rise in net current assets• Debt service coverage ratio has fallen by 67% over the last 3 years.

The view is that the company was conservative when the times were bad and they aggressively ramped up business when the business environment improves

• Collection period has gone up dramatically by 94% over 3 year period

• GPM has improved by almost 400 basis points • NPM has increased by more than 300 basis points