Larsen and Toubro Limited

Ratings Reaffirmed

 

Rating Action

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

 

Fixed Deposits Programme	CRISIL AAA/Stable (Reaffirmed)
Rs.100 Crore Inflation-linked Capital-indexed Non-Convertible Debenture	CRISIL AAA/Stable (Reaffirmed)
Non Convertible Debentures Aggregating to Rs.2300 Crore (Reduced from Rs.4300 Crore)	CRISIL AAA/Stable (Reaffirmed)
Rs.6800 Crore (Reduced from 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)
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/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Larsen and Toubro Limited (L&T; part of the L&T group).

 

CRISIL Ratings has also withdrawn its rating on Rs 4200 crore non-convertible debentures (NCDs) of L&T on receipt of requisite documents. The instruments have been fully redeemed. (See ‘Annexure - Details of Rating Withdrawn' for details). The action is in line with CRISIL Ratings’ policy on withdrawal of ratings.

 

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

 

Consolidated revenue, excluding financial services, rose 25% to around Rs 32,895 crore in the first quarter of this fiscal, driven by rebound in EPC business and resilient growth in the information technology and technology services (IT&TS) segments. EBITDA margin remain healthy at ~12% driven by healthy growth in the EPC business resulting in healthy operating leverage as well as sustained margins of the IT&TS segment.  As on June 30, 2022 the unexecuted order book stood at Rs 3.6 lakh crore coupled with healthy sector outlook which provides good prospects for the growth of L&T’s topline while sustaining its profitability.

 

For fiscal 2022, adjusted net debt to Ebitda ratio stood 0.9 time including capital allocation for the financial services business. Net debt to EBITDA is expected to improve further driven by healthy cash accruals coupled with the planned divestment of developmental projects over the medium term.

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 subsidiaries in financial services business, wherein the capital required for maintaining their credit profile is factored.

 

CRISIL Ratings has fully consolidated 89 subsidiaries, including infrastructure holding companies L&T Power Development Ltd (L&T PDL) and L&T Realty Developers Ltd (L&T Realty), because these entities form a core part of L&T’s business risk profile.

 

CRISIL Ratings has fully consolidated the special purpose vehicle (SPV), L&T Metro Rail (Hyderabad) Ltd (LTMRHL; rated ‘CRISIL AAA(CE)/Stable/CRISIL A1+’), as L&T is providing guarantee for its 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 SPVs.

 

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.

 

CRISL Ratings has de-consolidated Nabha Power Limited (NPL; rated ‘CRISIL AA-/Positive/CRISIL A1+’) as the corporate guarantee extended by L&T will soon cease to exist upon full drawdown from refinancing tied-up with PFC Ltd. Further, the company has been considered as a part of non-core assets by L&T and the parent has publicly articulated its intent to divest the asset.

 

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:

• 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 June 2022, the group had orders of Rs 3.6 lakh crore, led by the infrastructure segment (73%), hydrocarbon segment (16%) and the rest from the hi-tech manufacturing and power segments. International orders accounted for 28% of the order book with bulk of the orders from the Middle East. These should provide strong revenue visibility of over 3 years.

 

The group enjoys strong diversity supported by increasing revenue contribution of the service oriented businesses'IT&TS and financial services accounted for around 28% of consolidated revenue in fiscal 2022.

 

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, defense, solar, energy storage and water treatment sectors.

 

• Healthy capital structure and robust financial flexibility: The group has a conservative financial policy, as reflecting in adjusted net debt to Ebitda ratio of 0.9 time including capital allocation for the finance subsidiary driven by strong cash accrual built up through core business. Net debt to EBITDA is expected to improve supported by healthy cash accruals coupled with the planned divestment of developmental projects over the medium term.

 

The financial flexibility is supported by the group’s ability to raise funds at competitive rates as well as robust cash and equivalent of more than Rs 23,000 crore (CRISIL adjusted) as of March 2022. It is also bolstered by market value of over Rs 1.3 lakh crore of the listed investments in the IT&TS and financial services companies as on September 30, 2022. CRISIL Ratings expects the capital structure, debt protection metrics and financial flexibility to remain strong.

 

• Healthy share of the high-margin IT&TS segment: Share of the IT&TS segment in the revenue and operating profitability stands around 21% and 40%, respectively on consolidated basis. 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 290 days as on March 31, 2022. The group manages working capital efficiently through customer advances and payables. Public sector orders account for over 85% of the total order book, 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. The operations of LTMRHL, which commissioned around five 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. A gradual recovery in traffic to over 4 lakh commuters per day has been now reached.

Liquidity: Superior

L&T has robust liquidity, driven by cash and equivalent of around Rs 23,000 crore (CRISIL adjusted) as of March 2022. Expected net cash accrual of more than Rs 10,000 crore in fiscals 2023 and 2024 will adequately cover incremental working capital, capital expenditure, scheduled debt obligation as well as support towards its subsidiaries, including LTMRHL.

 

ESG Profile

The EPC sector has a significant environment and social impact due to its nature of operations with higher emissions, waste generation and water consumption affecting local community and increasing possibility of health hazards.

 

However, CRISIL Ratings believes that L&T’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The company is taking a slew of initiatives towards environmental and social cause some of which are highlighted below.

 

Key ESG highlights:

• L&T has committed to Water and Carbon Neutrality by 2035 and 2040 respectively. Also, company has set interim targets on other Environment and Social parameters, targeted for FY 2025-26.
• Portfolio of green businesses, which includes solar, water, green hydrogen, and some other renewable projects, is steadily growing and presently constitutes >30% of the total revenue.
• In FY 2021-22, the Company spent Rs 136 crore on CSR activities.
• L&T governance structure is characterized by 44% of its board comprising independent directors, split in chairman and CEO position, dedicated investor grievance redressal system and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. L&T’s commitment to ESG will play a key role in enhancing stakeholder confidence, given high shareholding by foreign portfolio investors and access to both domestic and foreign capital markets.

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; CRISIL Ratings adjusted)

Particulars (As on year ended 31st March)	Unit	2022	2021
Revenue	Rs crore	1,01,634	87,361
Profit after tax (PAT)	Rs crore	7,879	11,798
PAT margin	%	7.8	13.5
Adjusted debt / Adjusted networth	Times	0.30	0.40
Interest coverage	Times	6.28	4.29

 

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
INE018A08AU7	NCDs	24-Jan-20	6.72%	24-April-23	1,000	Simple	CRISIL AAA/Stable
INE018A08BD1	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
INE018A08AY9	NCDs	23-Apr-20	7.25%	23-April-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	7-365 days	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	CRISIL AAA/Stable
NA	Non-fund based facilities	NA	NA	NA	1,00,000	NA	CRISIL AAA/Stable

*These are partly paid NCDs out of that Rs 450 crore yet to be called up from debentures holders.

 

Annexure - Details of Rating Withdrawn

ISIN	Type of instrument	Date of allotment	Coupon  rate (%)	Maturity date	Issue size (Rs cr)	Complexity level
INE018A08AS1	NCDs	22-May-19	8.02%	22-May-22	2,000	Simple
INE018A08AR3	NCDs	18-Apr-19	7.87%	18-Apr-22	1,500	Simple
INE018A08AJ0	NCDs	10-Apr-12	9.75%	11-Apr-22	250	Simple
INE018A08AX1	NCDs	23-Apr-20	7%	23-Apr-22	450	Simple

 

Annexure – List of entities consolidated

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.
HI-TECH ROCK PRODUCTS & AGGREGATES LIMITED	Full
L&T GEOSTRUCTURE PRIVATE LIMITED	Full
L&T INFRASTRUCTURE ENGINEERING LIMITED	Full
LARSEN & TOUBRO (EAST ASIA) SDN.BHD	Full
LARSEN & TOUBRO (OMAN) LLC	Full
LARSEN & TOUBRO (T&D) SA (PROPRIETARY) LIMITED	Full
L&T HYDROCARBON SAUDI COMPANY LLC	Full
L&T MODULAR FABRICATION YARD LLC	Full
L&T SAPURA OFFSHORE PRIVATE LIMITED	Full
L&T SAPURA SHIPPING PRIVATE LIMITED	Full
LARSEN & TOUBRO ELECTROMECH LLC	Full
LARSEN & TOUBRO HEAVY ENGINEERING LLC	Full
LARSEN & TOUBRO KUWAIT CONSTRUCTION GENERAL CONTRACTING COMPANY WLL	Full
LARSEN TOUBRO ARABIA LLC	Full
L&T SPECIAL STEELS AND HEAVY FORGINGS PRIVATE LIMITED	Full
L&T MBDA MISSILE SYSTEMS PRIVATE LIMITED	Full
LTH MILCOM PRIVATE LIMITED	Full
L&T CONSTRUCTION EQUIPMENT LIMITED	Full
L&T VALVES LIMITED	Full
L&T VALVES ARABIA MANUFACTURING LLC	Full
L&T VALVES USA LLC	Full
LARSEN & TOUBRO INFOTECH LIMITED	Full
CUELOGIC TECHNOLOGIES INC.	Full
CUELOGIC TECHNOLOGIES PRIVATE LIMITED	Full
L&T INFORMATION TECHNOLOGY SERVICES (SHANGHAI) CO. LTD.	Full
L&T INFORMATION TECHNOLOGY SPAIN S.L.	Full
L&T INFOTECH FINANCIAL SERVICES TECHNOLOGIES INC.	Full
L&T INFOTECH S.DE.RL.DE.CV	Full
LARSEN & TOUBRO INFOTECH CANADA LIMITED	Full
LARSEN & TOUBRO INFOTECH GmbH	Full
LARSEN & TOUBRO INFOTECH LLC	Full
LARSEN & TOUBRO INFOTECH NORGE AS	Full
LARSEN & TOUBRO INFOTECH SOUTH AFRICA (PTY) LIMITED	Full
LARSEN & TOUBRO INFOTECH UK LIMITED	Full
LTI MIDDLE EAST FZ-LLC	Full
LYMBYC SOLUTIONS INC	Full
LYMBYC SOLUTIONS PRIVATE LIMITED	Full
NIELSEN + PARTNER UNTERNEHMENSBERATER GMBH	Full
NIELSEN + PARTNER UNTERNHMENSBERATER AG	Full
NIELSEN&PARTNER COMPANY LIMITED	Full
NIELSEN&PARTNER PTY. LTD.	Full
NIELSEN+PARTNER PTE. LTD.	Full
POWERUPCLOUD TECHNOLOGIES PRIVATE LIMITED	Full
RULETRONICS SYSTEMS INC.	Full
RULETRONICS LIMITED, UK	Full
SYNCORDIS FRANCE SARL	Full
SYNCORDIS LIMITED	Full
SYNCORDIS PSF S.A.	Full
SYNCORDIS S.A	Full
L&T TECHNOLOGY SERVICES LIMITED	Full
ESENCIA TECHNOLOGIES INDIA PRIVATE LIMITED	Full
GRAPHENE SEMICONDUCTORS SERVICES PVT LTD	Full
GRAPHENE SOLUTIONS PTE. LTD.	Full
GRAPHENE SOLUTIONS SDN.BHD	Full
GRAPHENE SOLUTIONS TAIWAN LTD	Full
L&T TECHNOLOGY SERVICES (CANADA) LIMITED	Full
L&T TECHNOLOGY SERVICES (SHANGHAI) CO. LTD	Full
L&T TECHNOLOGY SERVICES LLC	Full
L&T THALES TECHNOLOGY SERVICES PRIVATE LIMITED	Full
ORCHESTRA TECHNOLOGY INC.	Full
SEASTAR LABS PRIVATE LIMITED	Full
MINDTREE LIMITED	Full
BLUEFIN SOLUTIONS SDN.BHD.	Full
MINDTREE SOFTWARE (SHANGHAI) CO. LTD.	Full
LARSEN & TOUBRO LLC	Full
L&T - SARGENT & LUNDY LIMITED	Full
LARSEN & TOUBRO QATAR LLC @	Full
L&T PAREL PROJECT PRIVATE LIMITED	Full
L&T HOWDEN PRIVATE LIMITED	Full
BHILAI POWER SUPPLY COMPANY LIMITED	Full
L&T AVIATION SERVICES PRIVATE LIMITED	Full
KESUN IRON AND STEEL COMPANY PRIVATE LIMITED#	Full
L&T HYDROCARBON CASPIAN LLC	Full
LARSEN AND TOUBRO SAUDI ARABIA LLC	Full
PT. LARSEN & TOUBRO HYDROCARBON ENGINEERING INDONESIA	Full
L&T CAPITAL COMPANY LIMITED	Full
L&T GLOBAL HOLDINGS LIMITED	Full
L&T POWER LIMITED	Full
LARSEN & TOUBRO INTERNATIONAL FZE	Full
RAYKAL ALUMINIUM COMPANY PRIVATE LIMITED	Full
L&T REALTY DEVELOPERS LIMITED	Full
CHENNAI VISION DEVELOPERS PRIVATE LIMITED	Full
LTR SSM PRIVATE LIMITED	Full
L&T INNOVATION CAMPUS (CHENNAI) LIMITED	Full
L&T SEAWOODS LIMITED	Full
L&T POWER DEVELOPMENT LIMITED	Full
L&T - MHI POWER BOILERS PRIVATE LIMITED	Proportionate
L&T - MHI POWER TURBINE GENERATORS PRIVATE LIMITED	Proportionate
L&T ARUNACHAL HYDROPOWER LIMITED	Moderate
L&T HIMACHAL HYDROPOWER LIMITED
L&T INFRASTRUCTURE DEVELOPMENT PROJECTS LIMITED
AHMEDABAD - MALIYA TOLLWAY LIMITED
L&T DECCAN TOLLWAYS LIMITED
L&T INTERSTATE ROAD CORRIDOR LIMITED
L&T RAJKOT-VADINAR TOLLWAY LIMITED
L&T SAMAKHIALI GANDHIDHAM TOLLWAY LIMITED
L&T SAMBALPUR ROURKELA TOLLWAY LIMITED
L&T TRANSPORTATION INFRASTRUCTURE LIMITED
L&T-CHENNAI TADA TOLLWAY LIMITED
PANIPAT ELEVATED CORRIDOR LIMITED
PNG TOLLWAY LIMITED
VADODARA BHARUCH TOLLWAY LIMITED
WATRAK INFRASTRUCTURE PRIVATE LIMITED
LT IDPL INDVIT SERVICES LIMITED
L&T FINANCE HOLDINGS LIMITED	Capital allocation
L&T FINANCE LIMITED
L&T FINANCIAL CONSULTANTS LIMITED
L&T INFRA CREDIT FUND LIMITED
L&T INFRA INVESTMENT PARTNERS ADVISORY PRIVATE LIMITED
L&T INFRA INVESTMENT PARTNERS TRUSTEE PRIVATE LIMITED
L&T INVESTMENT MANAGEMENT LIMITED
L&T MUTUAL FUND TRUSTEE LIMITED
MUDIT CEMENT LIMITED

#In process of being struck off from register of companies

@Under liquidation