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bank facilities and debt instruments of Larsen and Toubro Ltd (L&T; part of the L&T group), CRISIL Ratings has also withdrawn its rating on the non-convertible debenture of Rs 450 crore (See the Details of Rating Withdrawn) on confirmation from the debenture trustee as it is fully redeemed. The rating is withdrawn in line with CRISIL's policy.
The ratings continue to reflect the group’s dominant position in the engineering, procurement and construction (EPC) market in India, diversified presence, strong financial risk profile and robust financial flexibility. These strengths are partially offset by large working capital requirement in the EPC segment.
Post a weak first half, order inflows witnessed robust recovery in the second half of fiscal 2021 because of increase in awarding, thus limiting overall decline to 6% to Rs 1.76 lac crore. Consolidated revenue declined by around 7% to Rs 1.36 lac crore. The impact on execution in EPC was partly offset by resilient performance of the information technology and technology services (IT&TS) segment. Operating margin improved slightly by 30 basis points to 11.5%, supported by better job mix and cost control measures. Consolidated profit after tax (PAT) rose by around 20% to Rs 12,921 crore driven by exceptional gain on divestment of electrical & automation (E&A) division and high treasury income, despite being partly offset by write-off of exposure in the heavy forging business and impairment of assets in the power development business. Working capital requirement was moderate in fiscal 2021 because of improved collection. Consolidated adjusted net debt declined to around Rs 1,500 crore driven by higher operating cash flows as well as E&A divestment proceeds. The Covid induced lockdown impacted Hyderabad Metro traffic in fiscal 2021 and parent infused around Rs 1,000 crore towards operational losses and debt servicing.
With the easing of restrictions on supply chain and execution in fiscal 2022, the group is expected to see strong rebound in the EPC business and steady growth in IT&TS. Order inflows should increase backed by increased thrust on infrastructure by the government. Commodity inflation, especially in the form of elevated steel prices, would weigh on EPC segment profitability. However, it will be mitigated through improved operating leverage and around 60% pass-through of the cost escalation. L&T’s support towards Hyderabad Metro is expected to increase to around Rs 1,500 crore this fiscal as the second wave of Covid continues to impact the ridership even as debt servicing is higher. |
Analytical Approach CRISIL Ratings has used a combination of full, proportionate and moderate consolidation of the L&T group companies. For financial subsidiaries, CRISIL Ratings has applied the capital allocation method.
CRISIL Ratings has proportionately consolidated two joint ventures (JVs) to the extent of its shareholding in these entities to reflect support required to the extent of its interests in these businesses. It has used the capital allocation method for the 12 finance subsidiaries, wherein the capital required for maintaining the credit profile is factored.
CRISIL Ratings has fully consolidated the special-purpose vehicle (SPV), Nabha Power Ltd (Nabha; ‘CRISIL A1+’), as L&T has provided a corporate guarantee for debt raised. Debt in the remaining infrastructure SPVs has not be consolidated as the debt is non-recourse to L&T. However, in line with its moderate consolidation approach, CRISIL Ratings factors in L&T’s support to fund any equity requirement, cost overruns and any support towards debt obligation in these infrastructure and power development SPVs. Post transfer of 100% stake of L&T Metro Rail (Hyderabad) Ltd (LTMRHL) from L&T IDPL to L&T, CRISIL Ratings continues to factor in L&T’s support to fund the equity component of the investment in this project and any shortfall in the initial stage of operations (in line with its moderate consolidation approach).
In order 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.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
As of March 2021, the group had orders of Rs 3.27 lac crore, led by the infrastructure segment (74%), followed by the hydrocarbon segment (14%) and remaining by heavy & defence engineering and power segments. International orders accounted for 22% 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 company enjoys strong diversity supported by increasing presence of the service oriented businesses – IT&TS and financial services, which contributed to 31% of consolidated revenue in fiscal 2021.
CRISIL Ratings believes the 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.
The group had a conservative financial policy, as indicated by gearing of less than 0.4 time till fiscal 2019. However, in order to build additional liquidity amid the pandemic, debt increased in fiscal 2020, resulting in gearing of 0.5 time as on March 31, 2020. Gearing fell to 0.2 time as on March 31, 2021, driven by strong cash accrual and sizeable E&A proceeds. Adjusted net debt to earnings before interest, tax, depreciation and amortization (EBITDA) moderated sharply to 0.4 time in fiscal 2021 from 1.7 time in fiscal 2020.
CRISIL Ratings expects the capital structure, debt protection metrics and financial flexibility to remain strong over the medium term.
Going forward, CRISIL Ratings expects RoCE to improve driven by better profitability. The group will continue to look for opportunities to divest its non-core developmental projects, including Nabha power and L&T Metro, over the medium term.
Weakness
Given the intent of the management to judiciously bid for projects with lower working capital requirement as well as efforts in reducing outstanding receivables and inventory, GCA are expected to decline and will be a key monitorable over the medium term. |
Liquidity: Superior L&T has robust liquidity, driven by cash and equivalent of Rs 47,200 crore as of March 2021. Sizeable cash balance ensured utilization of fund-based and commercial paper limits remained moderate at 40-45% during fiscal 2021. Expected net cash accrual of Rs 9,000-10,000 crore in fiscal 2022 will adequately cover incremental working capital and capital expenditure requirement, scheduled debt maturities as well as support towards its subsidiaries, including L&T Metro. |
Outlook: Stable CRISIL Ratings believes the 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. The profitability is expected to be stable, supported by the increasing contribution of the IT business. |
Rating Sensitivity factors Downward Factors:
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About the Group 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. L&T 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)
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Any other information:
Annexure – Key features of the Rs 1,800 crore partly paid up NCD
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| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Rs 1,800 crore NCDs are partly paid up – refer to Annexure on key features
Annexure - Details of Rating Withdrawn
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Annexure - List of Entities Consolidated with L&T Ltd
^^ceased to be a subsidiary wef 01-09-2020 pursuant to sale of entire stake by the company ^^^merged with L&T Finance Ltd wef 01-04-2020 %%ceased to be a subsidiary wef 01-12-2020 pursuant to sale of stake by parent @company dissolved on 30-03-2021 @@merged with L&T Hydrocarbon Engineering wef 01-04-2020 * company dissolved on 21-01-2021 **ceased to be a subsidiary wef 25-04-2020 pursuant to sale of stake by parent #in process of being struck off from register of companies ##liquidated on 16-05-2020 |
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||
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Criteria Details
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