Larsen and Toubro Limited

Ratings Reaffirmed

 

Rating Action

Total Bank Loan Facilities Rated	Rs.110000 Crore
Long Term Rating	CRISIL AAA/Stable (Reaffirmed)

 

Rs.100 Crore Inflation-linked Capital-indexed Non-Convertible Debenture	CRISIL AAA/Stable (Reaffirmed)
Rs.1000 Crore Non Convertible Debentures	CRISIL AAA/Stable (Withdrawn)
Non Convertible Debentures Aggregating to Rs.4300 Crore (Reduced from Rs.4900 Crore)	CRISIL AAA/Stable (Reaffirmed)
Rs.1400 Crore Non Convertible Debentures	CRISIL AAA/Stable (Withdrawn)
Rs.9000 Crore Non Convertible Debentures	CRISIL AAA/Stable (Reaffirmed)
Rs.1350 Crore Non Convertible Debentures	CRISIL AAA/Stable (Reaffirmed)
Rs.1331 Crore Non Convertible Debentures	CRISIL AAA/Stable (Reaffirmed)
Fixed Deposits Programme	FAAA/Stable (Reaffirmed)
Rs.16000 Crore Commercial Paper	CRISIL A1+ (Reaffirmed)

1 crore = 10 million   

Refer to annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/FAAA/Stable/CRISIL A1+' ratings on the long-term bank facilities and debt instruments of Larsen and Toubro Limited (L&T; part of the L&T group),

 

The ratings continue to reflect the L&T group’s dominant position in the engineering, procurement and construction (EPC) market in India, diversified presence and strong financial risk profile and robust financial flexibility. These strengths are partially offset by large working capital requirement in the EPC segment.

 

L&T has proposed to extend a corporate guarantee/letter of comfort (LoC) for the proposed non-convertible debenture (NCD) and commercial paper (CP) programme aggregating Rs 13,150 crore at its wholly owned subsidiary, L&T Metro Rail (Hyderabad) Ltd (LTMRHL; ‘Provisional CRISIL AAA(CE)/Stable/CRISIL A1+’). This will increase the net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio will increase to about 1.5-1.6 times for fiscal 2022 before moderating to about 1.2-1.3 times in fiscal 2023. However, net leverage is expected to sustain below 2 times on an ongoing basis.

 

Consolidated revenue, excluding financial services, rose 27% to around Rs 55,900 crore in the first half of this fiscal, driven by rebound in EPC business and resilient growth in the information technology and technology services (IT&TS) segments. Ebitda margin improved by 130 basis points to 12.9% driven by healthy growth in the EPC business resulting in improved operating leverage as well as better mix in the IT&TS segment. Collections were strong, particularly in the EPC business, leading to improved cash flow from operations.

Analytical Approach

CRISIL Ratings has used a combination of full, proportionate and moderate consolidation of the L&T group companies. It has used the capital allocation method for the nine finance subsidiaries, wherein the capital required for maintaining the credit profile is factored.

 

CRISIL Ratings has fully consolidated 74 subsidiaries, including infrastructure holding companies L&T Power Development Ltd (L&T PDL) and L&T Realty Ltd (L&T Realty), because these entities form a core part of L&T’s business risk profile.

 

CRISIL Ratings has proportionately consolidated two joint ventures (JVs) to the extent of the shareholding of L&T to reflect support required to the extent of its interests in these businesses.

 

CRISIL Ratings has fully consolidated the special purpose vehicles (SPVs), Nabha Power Ltd (NPL; ‘CRISIL A1+’) and LTMRHL (from moderate consolidation earlier), as L&T is providing guarantee for the debt instruments. Debt in the remaining infrastructure SPVs has not been consolidated as the debt is non-recourse to L&T. However, in line with its moderate consolidation approach, CRISIL Ratings has factored in support from L&T to fund any equity requirement, cost overruns and debt obligation in these infrastructure and power development SPVs.

 

To arrive at the adjusted net debt, surplus cash (cash exceeding Rs 5,500 crore which is assumed as minimum operational cash) has been reduced.

Key Rating Drivers & Detailed Description

Strengths:

• Dominant position in the domestic EPC segment and diversified revenue profile: The L&T group’s dominance in the domestic EPC segment is supported by its track record of more than seven decades, ability to cater to several sectors and strong brand. The business spans a spectrum of projects, ranging from complex turnkey EPC projects to simple construction activities. In-house design, engineering and fabrication capabilities for critical equipment and systems give a strong competitive advantage. Strong competencies across segments and sectors along with a track record of completing projects as per specifications have led to a robust brand image in India and overseas.

 

As of September 2021, the group had orders of Rs 3.30 lakh crore, led by the infrastructure segment (74%), followed by the hydrocarbon segment (15%) and the rest from the heavy and defence engineering and power segments. International orders accounted for 23% of the order book with bulk of the orders from the Middle East. These should provide strong revenue visibility of over 3.5 years.

 

The group enjoys strong diversity supported by increasing revenue contribution of the service oriented businesses'IT&TS and financial services accounted for around 31% of consolidated revenue in fiscal 2021.

 

CRISIL Ratings believes the L&T group will maintain its dominant position in the EPC market in India by judiciously bidding for projects across infrastructure, defence, solar, energy storage and water treatment sectors.

 

• Healthy capital structure and robust financial flexibility: The group had a conservative financial policy, as reflecting in gearing of 0.2 time as on March 31, 2021, driven by strong cash accrual built up through core business as well as monetization of the non-core electrical and automation division. For fiscal 2021, adjusted net debt to Ebitda ratio stood at 0.1 time without capital allocation and at 0.6 time including capital allocation. Considering the consolidation of L&T Metro and capital allocation for the finance subsidiary, the adjusted net debt to Ebitda ratio is expected to increase to 1.5-1.6 times for fiscal 2022 before moderating next fiscal.

 

However, the financial flexibility is supported by the group’s ability to raise funds at competitive rates as well as robust cash and equivalent of around Rs 35,000 crore as of September 2021. It is also bolstered by market value of over Rs 1.8 lakh crore of the listed investments in the IT&TS and financial services companies as on December 1, 2021. CRISIL Ratings expects the capital structure, debt protection metrics and financial flexibility to remain strong.

 

• Increasing share of the high-margin IT&TS segment: Over the past five years, the share of the IT&TS segment in the revenue and operating profitability has increased sharply to around 20% and 30%, respectively. IT&TS is a high-margin business and less working capital intensive than the EPC segment, resulting in higher return on capital employed (adjusted RoCE). CRISIL Ratings expects the RoCE to improve driven by better profitability.

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs) net of cash were large at around 300 days as on March 31, 2021. The group manages working capital efficiently through customer advances and payables. Public backlog accounts for over 85% of the total backlog, which mitigates the credit risk. The rising revenue share of IT&TS has also helped contain the working capital requirement with standalone GCAs being higher.

 

Given the intent of the management to judiciously bid for projects with lower working capital requirement as well as efforts to reduce receivables and inventory, GCAs are expected to decline and will be a key monitorable over the medium term.

 

• Significant capital employed in low-return developmental projects: Substantial capital is employed in the developmental projects under LTMRHL and NPL. The operations of LTMRHL, which commissioned around four years ago with significant time and cost overruns, were impacted by the lockdowns due to covid-19 resulting in sharp decline in traffic to below 2 lakh commuters per day. While a gradual recovery in traffic is expected, given the total investment of over Rs 18,000 crore including a debt burden of over Rs 13,000 crore, the project will need to achieve traffic of around 9 lakh commuters per day to break even at the profit after tax (PAT) level. Till then L&T will need to support the cash flows shortfall. NPL too has a moderate return profile due to under-recoveries, both in fixed and variable costs. However, L&T is looking to exit these non-strategic investments over the medium term.

Liquidity: Superior

L&T has robust liquidity, driven by cash and equivalent of around Rs 35,000 crore as of September 2021. The sizeable cash and equivalent has led to moderate utilization of fund-based limits at 40-45%. Expected net cash accrual of Rs 9,000-10,000 crore in fiscals 2022 and 2023 will adequately cover incremental working capital, capital expenditure, scheduled debt obligation as well as support towards its subsidiaries, including LTMRHL.

Outlook: Stable

CRISIL Ratings believes L&T will maintain its leadership position in the EPC segment in India, and is positioned to benefit from the infrastructure spending in India over the medium term. Its profitability is expected to be stable, supported by the increasing contribution of the IT business.

Rating Sensitivity factors

Downward factors

• Further stretch in the working capital cycle on a sustained basis
• Sustained increase in adjusted net debt to Ebitda ratio above 2 times

About the Company

Set up in 1938 by Mr H H Larsen and Mr S K Toubro, L&T was incorporated in 1946 and reconstituted as a public limited company in 1950. It is one of Asia’s largest vertically integrated EPC conglomerates, with a strong market position across segments such as infrastructure, power, hydrocarbons, heavy engineering, defense engineering, electrical and automation, IT, IT&TS, metallurgical and material handling, and machinery and industrial products. L&T undertakes infrastructure development projects (roads, metro rail, power and transmission lines) through its SPVs: L&T IDPL, L&T PDL and LTMRHL.

Key Financial Indicators L&T (standalone; reported)

Particulars	Unit	2021	2020
Revenue	Rs crore	73,316	82,384
Profit after tax (PAT)	Rs crore	11,336	6,679
PAT margin	%	15.5	8.1
Adjusted debt / Adjusted networth	Times	0.39	0.49
Interest coverage	Times	4.43	4.25

 

Any other information:

Annexure: Key features of the Rs 1,800 crore partly paid up NCD

Nature of instrument	Unsecured
Tenure	10 years
Payment of issue price	Each of the investors agrees and acknowledges that as the Rs 1,800 crore debentures are partly paid instruments, the investors shall be obliged to make payment of the issue price in the manner and on the payment dates set out hereunder:   S. No Payment date Issue price payable 1. Pay-in date (April 23, 2020) 25% of the face value 2. First balance payment (April 23, 2021) 25% of the face value 3. Second balance payment (April 23, 2022) 25% of the face value 4. Third balance payment (April 23, 2023) 25% of the face value On failure of the debenture holders to pay any balance payment due, the company has the right to forfeit the entire paid up amount
Coupon rate	8% per annum (fixed)

 

Annexure - Details of Instrument(s)

ISIN	Type of instrument	Date of allotment	Coupon  rate (%)	Maturity date	Issue size (Rs cr)	Complexity level	Rating assigned with outlook
INE018A08AS1	NCDs	22-May-19	8.02%	22-May-22	2,000	Simple	CRISIL AAA/Stable
INE018A08AU7	NCDs	24-Jan-20	6.72%	24-April-23	1,000	Simple	CRISIL AAA/Stable
INE018A08AZ6	NCDs*	23-Apr-20	8%	23-April-30	1,800	Simple	CRISIL AAA/Stable
INE018A08AV5	NCDs	20-Apr-20	7.2%	20-April-23	1,250	Simple	CRISIL AAA/Stable
INE018A08BB5	NCDs	6-May-20	7.25%	06-May-24	1,450	Simple	CRISIL AAA/Stable
INE018A08BA7	NCDs	28-Apr-20	7.7%	28-April-25	2,500	Simple	CRISIL AAA/Stable
INE018A08AR3	NCDs	18-Apr-19	7.87%	18-April-22	1,500	Simple	CRISIL AAA/Stable
INE018A08AJ0	NCDs	10-Apr-12	9.75%	11-Apr-22	250	Simple	CRISIL AAA/Stable
INE018A08AX1	NCDs	23-Apr-20	7%	23-Apr-22	450	Simple	CRISIL AAA/Stable
INE018A08AY9	NCDs	23-Apr-20	7.25%	23-Apr-23	2,450	Simple	CRISIL AAA/Stable
INE018A08AK8	Inflation linked capital indexed NCDs	23-May-13	1.65% p.a. payable on inflation adjusted principal	23-May-23	100	Highly Complex	CRISIL AAA/Stable
INE018A07763	NCDs	25-Oct-12	9.10%	25-Oct-23	260	Complex	CRISIL AAA/Stable
INE018A07771	NCDs	25-Oct-12	9.10%	25-Oct 24	260	Complex	CRISIL AAA/Stable
INE018A07789	NCDs	25-Oct-12	9.10%	25-Oct-25	260	Complex	CRISIL AAA/Stable
INE018A07797	NCDs	25-Oct-12	9.10%	25-Oct-26	260	Complex	CRISIL AAA/Stable
INE018A07805	NCDs	25-Oct-12	9.10%	25-Oct-27	291	Complex	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	NA	16,000	Simple	CRISIL A1+
NA	Fund-Based Facilities	NA	NA	NA	10,000	NA	CRISIL AAA/Stable
NA	Fixed Deposits	NA	NA	NA	0	Simple	FAAA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	1,00,000	NA	CRISIL AAA/Stable

*These are partly paid NCDs out of that Rs 900 crore yet to be called up from debentures holders.

Annexure – List of entities consolidated with L&T Ltd

Name of the company	Extent of consolidation	Rationale for consolidation
L&T Metro Rail (Hyderabad) Ltd	Full	All these companies have significant managerial, operational and financial linkages and are collectively referred to as the L&T group.
Nabha Power Ltd	Full
L&T Technology Services Ltd	Full
Larsen & Toubro Infotech Ltd	Full
L&T Thales Technology Services Pvt Ltd	Full
L&T Technology Services LLC	Full
Esencia Technologies Inc	Full
Esencia Technologies India Pvt Ltd	Full
Larsen & Toubro LLC	Full
Larsen & Toubro Infotech GmbH	Full
L&T Power Development Ltd	Full
Larsen & Toubro Infotech Canada Ltd	Full
Larsen & Toubro Infotech LLC	Full
MindTree Ltd	Full
L&T Infotech Financial Services Technologies Inc	Full
Larsen & Toubro Infotech South Africa (Pty) Ltd	Full
L&T Information Technology Services (Shanghai) Co Ltd	Full
Larsen & Toubro Infotech Austria Gmbh	Full
L&T Information Technology Spain SL	Full
L&T Infotech S De RL De CV	Full
Syncordis Software Service India Pvt Ltd	Full
Syncordis SA	Full
Syncordis Support Services SA	Full
Syncordis Ltd	Full
Syncordis France SARL	Full
L&T Realty Ltd	Full
Larsen & Toubro (Oman) LLC	Full
Larsen & Toubro Saudi Arabia LLC	Full
L&T Infrastructure Engineering Ltd	Full
Hi-Tech Rock Products & Aggregates Ltd	Full
Larsen & Toubro (T&D) SA (Proprietary) Ltd	Full
L&T Sapura Offshore Pvt Ltd	Full
Larsen & Toubro Kuwait Construction General Contracting Company WLL	Full
Larsen & Toubro Atco Saudia Company LLC	Full
Larsen Toubro Arabia LLC	Full
L&T Hydrocarbon Engineering Ltd	Full
L&T Modular Fabrication Yard LLC	Full
L&T-Gulf Pvt Ltd@@	Full
L&T Sapura Shipping Pvt Ltd	Full
Larsen & Toubro Electromech LLC	Full
Thalest Ltd	Full
Marine Infrastructure Developer Pvt Ltd	Full
L&T MBDA Missile Systems Ltd	Full
LTH Milcom Pvt Ltd	Full
L&T Special Steels And Heavy Forgings Pvt Ltd	Full
L&T Heavy Engineering LLC	Full
L&T - Sargent & Lundy Ltd	Full
L&T Howden Pvt Ltd	Full
L&T Construction Equipment Ltd	Full
L&T Valves Ltd	Full
L&T Global Holdings Ltd	Full
Larsen & Toubro International FZE	Full
L&T Aviation Services Pvt Ltd	Full
L&T Power Ltd	Full
Raykal Aluminium Company Pvt Ltd	Full
Bhilai Power Supply Company Ltd	Full
Kesun Iron & Steel Company Ltd#	Full
L&T Capital Company Ltd	Full
L&T Electrical & Automation Ltd	Full
L&T Infra Contractors Pvt Ltd#	Full
Larsen & Toubro (East Asia) SDN BHD	Full
L&T Geostructure LLP	Full
Larsen & Toubro (Saudi Arabia) LLC	Full
L&T-MHPS Boilers Pvt Ltd	Proportionate
L&T-MHPS Turbine Generators Pvt Ltd
L&T Arunachal Hydropower Ltd	Moderate
L&T Himachal Hydropower Ltd
L&T Uttaranchal Hydropower Ltd
L&T Seawoods Ltd
L&T Realty FZE
Chennai Vision Developers Pvt Ltd
L&T Vision Ventures Ltd
L&T Finance Holdings Ltd	Capital allocation
L&T Finance Ltd
L&T Infra Debt Fund Ltd
L&T Infra Investment Partners Advisory Pvt Ltd
L&T Infra Investment Partners Trustee Pvt Ltd
L&T Investment Management Ltd
L&T Mutual Fund Trustee Ltd
L&T Financial Consultants Ltd
Mudit Cement Ltd

#In process of being struck off from register of companies