| Larsen and Toubro Limited | ||||||||||||||||
| 'CRISIL AAA/Stable' assigned to non-convertible debentures | ||||||||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||||||||
| 1 crore = 10 million | ||||||||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs 1,500 crore proposed non-convertible debentures (NCDs) of Larsen and Toubro Limited (L&T; part of the L&T group) and has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and existing debt instruments of the company. Also, CRISIL Ratings has withdrawn the rating on non-convertible debentures aggregating to Rs 1,331 crore upon redemption and on receipt of repayment confirmation from the debenture trustee (see ‘Annexure - Details of rating withdrawn'). The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of ratings.
The ratings reflect the dominant position of the L&T group 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 36% on year to around Rs 44,862 crore in the first quarter of fiscal 2024, driven by strong execution growth in EPC business and resilient growth in the information technology and technology services (IT&TS) segments. Earnings before interest, tax, depreciation and amortization (EBITDA) margin, excluding financial services, remained healthy at 10.9%, 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, 2023 the unexecuted order book stood at Rs 4.1 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 2023, adjusted net debt to Ebitda ratio stood at 0.5 time, including capital allocation for the financial services business. Leverage measured in terms of net debt to EBITDA is expected to temporarily rise in fiscal 2024 owing to Rs 10,000 crore share buyback during September 2023. However, it is expected to return back to normal levels over the medium term driven by healthy cash accruals and divestments. |
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 the financial services business, by factoring in the capital required for maintaining their credit profile.
CRISIL Ratings has fully consolidated 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 the business risk profile of L&T.
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 the 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 continues to not consolidate Nabha Power Limited (NPL; rated ‘CRISIL AA/Stable/CRISIL A1+’) as the corporate guarantee extended by L&T 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:
As of June 2023, the group had orders of Rs 4.1 lakh crore, led by the infrastructure segment (73%), energy segment (18%), the hi-tech manufacturing (6%) and the rest from other segments. International orders accounted for 29% of the order book with bulk of the orders from the Middle East. These should provide strong revenue visibility of over three years.
The group enjoys strong diversity supported by increasing revenue contribution of the service-oriented businesses―IT&TS and financial services, which accounted for around 29% of consolidated revenue in fiscal 2023.
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.
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 23,700 crore (CRISIL adjusted) as of March 2023. It is also bolstered by significant market value of the listed investments in the IT&TS and financial services companies. CRISIL Ratings expects the capital structure, debt protection metrics and financial flexibility to remain strong.
Weaknesses:
Given the intent of the management to judiciously bid for projects with lower working capital requirement and its efforts to reduce receivables and inventory, GCAs are expected to decline and will be a key monitorable over the medium term.
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Liquidity: Superior L&T has robust liquidity, driven by cash and equivalent of around Rs 23,700 crore (CRISIL adjusted) as of March 2023. Expected net cash accrual of more than Rs 10,000 crore in fiscals 2024 and 2025, should suffice to cover the 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 given 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 causes, some of which are highlighted below.
Key ESG Highlights of L&T:
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 the 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
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About the Company Set up in 1938 by Mr HH Larsen and Mr SK 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 PDL and LTMRHL. |
Key Financial Indicators L&T (standalone; CRISIL Ratings adjusted)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be placed
Annexure - Details of Rating Withdrawn
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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