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Focus on de-carbonisation and green solutions

We hosted Larsen & Toubro (L&T) at ICICI Securities Virtual ESG Conference’21 on 25th Jun’21. The representatives elaborated on the various initiatives taken in terms of water conservation, steps to reduce electricity consumption, carbon neutrality, etc. An insight into the company’s defence business was also provided. Factoring-in the change in market cap of subsidiaries, we raise the target price for L&T to Rs1,760 (earlier Rs1,670).

Handling of labour:

Code of conduct both for the company and suppliers are adhered to, ensuring no unfair practices. L&T provides training to contract workers; it has also come up with a supplier questionnaire and assessment to fill any gaps in the same. Periodic audits are done to ensure adherence to rules by the subcontractors.

Reduction in labour fatality:

A committee, headed by a Board member, has been formed to reduce fatalities and improve processes to move towards zero fatality (automation and digitalisation-related solutions are being used for the same). Training is provided to employees using virtual reality to improve safety and ensure proper working practices.

Vendor relationships:

MSME vendors are paid within 30-45 days of supply; the company has 60,000-70,000 vendors. It also works with them to improve logistical and other bottlenecks and advise on solutions involving digital and other technologies.

Defence business:

L&T is engaged in manufacture of systems, vehicles and platforms and not in the ammunition part. It does not manufacture explosives or ammunition of any kind including cluster munitions, anti-personnel landmines, nuclear weapons, or components for such munitions. The business also does not customise any delivery systems for such munitions.

Green portfolio focus:

Currently, green energy consumption is at 8.5% of the total energy consumed and the target is to increase it to 15% in 2-3 years. Have achieved its 60% target for water recycling, L&T is working on further increasing the same. The major steps being taken on water conservation are: use of aerators, waterless urinals, plant operations improvement to stop leakages in the older plant pipelines, etc.

Energy management:

10,028mn-kWh of energy has been saved in the past 5-6 years cumulatively. This can supply energy to ~60,000 households for a year.

Outlook and valuation

L&T’s current ex-services orderbook at Rs3.3trn (3.5x TTM ex-services sales) provides growth visibility. Given the restart of ordering activity on large multilateral projects such as high-speed rail, we believe demand will improve and aid ordering from similar projects in segments like metro, water, etc. We adjust the balance sheet to factor-in the acquisition of 60.6% stake in Mindtree. We have consolidated the financials of Mindtree in our FY22E/FY23E estimates. We value the 60.6% stake as per the current market cap of Mindtree. Given the business moat in terms of execution capabilities, we assign a target P/E multiple of 22x to the standalone business. Hydrocarbon business has been valued separately at 18x FY23E earnings, and ‘other businesses’ as per industry norms. We arrive at an SoTP-based target price of Rs1,760 where the standalone business is valued at Rs881, and other subsidiaries, associates and BOT assets at Rs879 (post holding company discount @20%) per share).

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