CORPORATE FINANCE

Term Assignment

On “RISK,RETURN & OTHER ASPECTS OF LARSEN & TOUBRO”

POST GRADUATE DIPLOMA IN MANAGEMENT

(Term-II; Batch 2019-21)

Under the Supervision of

Dr. Moid Uddin Ahmad

Associate Professor- Corporate Finnce

Submitted by

GROUP 1

Akhil Kumar Thakur PGMA 1908

Aastha Singh PGMA 1901

Uttkarsh Singhal PGMA 1942

Abdullah Khan PGMA 1902

Ankita Verma PGMA 1911

JAIPURIA INSTITUTE OF MANAGEMENT

A-32 A, Sector 62, Institutional Area, Noida- 201309 (U.P.)

NOVEMBER 21, 2019

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 PART 1
1.
INTRODUCTION
Larsen & Toubro, with global operations, is a multinational company in software,
infrastructure, building, manufacturing and financial services. It is India's “major
and most respected” private sector company. The company operates in the
segment of Engineering & Construction, Electrical & Electronics, Machinery &
Industrial Products, and other three segments.

PROMOTERS
In 1946, Larsen & Toubro Ltd. became a private limited company. The business
was established earlier as a collaboration company in Mumbai, created by two
Danish engineers, Henning Holk Larsen & Soren Kristian Toubro. The business
became a public company with a paid-up capital of Rs.2 million in December
1950. During this time, they implemented prestigious orders including the Amul
Dairy at Rourkela Steel Plant's Anand and Blast Furnaces.

PRODUCT
The Engineering, Construction & Contracts Department (ECCD) of the business is
responsible for the engineering, design and construction of facilities, structures,
warehouses, water supply and metallurgical and material handling activities
including structural, mechanical, electrical and instrumentation planning
disciplines. Our Technology & Development Group models, technicians and
programs with front-end design for the hydrocarbon business. The heavy
construction business was divided into two separate companies: the Independent
Heavy Construction Company and the Individual Ship Building Company. Their
division of Electrical & Electronics comprises the business of the Independent
Company of Electrical and Automation and Medical Equipment and Systems.

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 SOME NEW PROJECTS
Larsen & Toubro (L&T) bagged a turnkey deal on June 25, 2019 to build a power
generation project worth more than Rs 7,000 crore after a three-year dry spell.
The firm will do design, procurement and construction (EPC) for the 1,320 mw
ultra supercritical power plant in Buxar district in Bihar, for SJVN Thermal Limited.
This contract, one of the largest earned by the firm for a power generation
venture, would support its power equipment sector that was struggling under the
news.
Engineering and construction giant L&T on Thursday on October 10, 2019 said it
received contracts worth up to Rs 2,500 crore from domestic and international
markets. L&T's engineering arm secured contracts for 400kV transmission line in
Mozambique and 220Kv venture in the UAE.

MARKET
L&T has an international presence, with branches expanding internationally.
Overseas earnings have grown significantly as a result of a drive for international
business. With facilities in China and the Gulf region, it continues to grow its
manufacturing footprint overseas. The businesses of the company are supported
by a wide network of marketing and distribution and have established a
reputation for strong customer support.

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 FINANCING OF L&T
STANDALONE

3.70
Market Cap (Rs Cr.) 1,93,785.46 Market Lot 1 Price/Book

Book Value (Rs) 373.31 EPS (TTM) 52.64 Face Value (RS) 2.00

Dividend (%) 900.00 P/C 22.92 Deliverables (%) 55.51

INCOME STATEMENT
Sep 2019 June 2019 March 2019 Dec 2018 Sep 2018

Net Sales 18,751.69 16,498.99 30,822.41 22,342.98 18,648.76

Other Income 1,022.16 462.11 796.62 887 723.79

PBDIT 1,553.05 1,215.96 3,460.91 2,140.29 1,659

Net Profit 1,983.60 1,392 2,377.42 1,634.78 1,753.71

BALANCE SHEET
Mar 2019 Mar 2018
Total Share Capital 280.55 280.28
Net worth 52,397.52 49,021.05
Total Debt 10,344.07 9,777.93
Net Block 7,181.71 6,940.53
Investments 24,834.45 27,339.24
Total Assets 62,742.29 58,798.98

YEAR YEAR END SHARE DIVIDENDS PAID

PRICE DURING THE YEAR (%)
2014 858.81 712.50
2015 1152.56 812.50
2016 811.17 912.50
2017 1038.35 700
2018 1310.90 800
2019 1385.30 1489.85

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 Larsen & Toubro
2 Market end share price
Average Holding
Dividen YOY Annual Period (5
Price d Return Return Years)
10.752413 6 61.30459
2012-13 46 Years 59
Average
12.902896 5 Annual
2013-14 858.81 14.25 16 Years Return
0.122609
2014-15 1152.56 16.25 34.204 19
2015-16 811.17 18.25 -29.620
2016-17 1038.35 14 28.006
2017-18 1310.9 16 26.248
2018-19 1385.3 18 5.675
Historical Return
2012-13
2013-14 0.000
2014-15 34.204
2015-16 -29.620
2016-17 28.006
2017-18 26.248
2018-19 5.675

Average Mean 10.752

Mean + σ Maximum Return 34.665

Mean - σ Minimum Return -13.161

Historical Return
Standard Deviation 23.913

Average annual return: (from Excel) AVERAGE (Year on year) = 0.12260

(share price of 2019−share price of 2014)

Holding period (5 years): 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 2014
∗ 100

= (1385.3-858.81/858.81) *100 = 61.304

Average annual Return: 61.304/5 = 12.26

Standard Deviation or risk return = 23.91

Maximum return (mean + σ) = (10.752 + 23.913) = 34.665
Minimum return (mean – σ) = (10.752 -23.913) = -13.161

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The portfolio, consequently, beat the record by in excess of a rate point.
Holding period return is helpful for making like examinations between Returns
on speculations acquired at various periods in time which is 61.304.

Alternately, the standard deviation of a portfolio gauges how much the

speculation returns go astray from the mean of the likelihood conveyance of
ventures. The standard deviation of a two-resource portfolio is determined by
squaring the heaviness of the main resource and increasing it by the
fluctuation of the primary resource, added to the square of the heaviness of
the subsequent resource, duplicated by the difference of the second resource
which is 23.913.

5.1400
3 Risk Free Rate (182 days) %

0.0514
Beta 1.31
Cost of Equity By CAPM Method
3 Year 2 Year 1 Year
28.06
Sensex Return (1Year) YTD 5.68% 26.25% %
0.280
0.0568 0.2625 6
‘Risk Free
Rate +
Beta * (
Market
return -
Risk free
Expected Rate of return E (r) Rate)’

1 Year E (r) 32.7941

Average market return = 1.390

Cost of Equity by CAPM method,

E(R) = Risk free rate + Beta*(Market Return – Risk free rate)
=5.14 + 1.31*(0.0568 – 5.14) = 1.0254

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ARR can be used when considering multiple projects since it provides the
expected rate of return from each project. ARR is helpful in determining the
annual percentage rate of return of a project. So, in this it is 13.90 which is
acceptable.

“The Capital Asset Pricing Model (CAPM) is a model that describes the
relationship between the expected return and risk of investing in a security. It
shows that the expected return on a security is equal to the risk-free return plus
a risk premium, which is based on the beta of that security. Below is an
illustration of the CAPM concept. So, in this it is 10.254%”

PART B

Dividen Dividend
4 Years Price d %
2012-13 597.42 18.5 616.55
2013-14 858.81 14.25 712.50%
2014-15 1152.56 16.25 812.50%
2015-16 811.17 18.25 912.50%
2016-17 1038.35 14 700%
2017-18 1310.9 16 800%
2018-19 1385.3 18 900%

Expected value of share in 2019-18

g=0.048
12467.
D0 900% OF 1385.3 7

13066.
D1 D0*(1+g) 15

P0 D1/(COST OF Equity - G) 399.01

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5 Calculation of Cost of Capital

Net
Ke 4.08 Worth 83.51
Cost of Debt 2.47 Total debt 0.165

WACC 6.55

WACC 6.55% means the company must pay its investors an average of
Rs.0.0655 in return for every Rs.1 in extra funding.