FINANCIAL ANALYSIS OF THE COMPANY

LARSEN & TOUBRO

By

PRERNA PATNAIK (FT-24-441)

2024 – 26
Company Profile: Larsen & Toubro (L&T)

Larsen & Toubro (L&T) is a prominent multinational conglomerate in India, active across a variety of
sectors including engineering, construction, manufacturing, technology, and financial services. The
company was founded in 1938 by Danish engineers Henning Holck-Larsen and Soren Kristian Toubro and
has since become a global leader, operating in over 30 countries and recognized for its excellence in project
execution, technological prowess, and sustainability initiatives.

Key Facts
• Founded: 1938
• Founders: Henning Holck-Larsen and Soren Kristian Toubro
• Headquarters: Mumbai, Maharashtra, India
• Chairman & Managing Director: S. N. Subrahmanyan
• Industry Sectors: Engineering, Construction, Manufacturing, Information Technology, Financial
Services
• Global Presence: 30+ countries
• Market Capitalization: Over ₹4 trillion (as of 2024)
• Listed On: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)
• Number of Employees: 50,000+ (as of 2024)

Business Segments
1. Engineering and Construction (E&C): L&T stands as one of the leading entities in India’s
construction and engineering landscape, offering services across various infrastructure projects,
power plants, civil engineering, and construction. They undertake projects across industries
involving airports, roads, bridges, power generation plants, and industrial facilities.
2. Heavy Engineering: This segment focuses on manufacturing essential equipment and systems for
sectors such as defence, nuclear power, aerospace, and oil & gas. They feature advanced fabrication
facilities that produce complex equipment meeting international standards.
3. Information Technology: L&T Technology Services and L&T Infotech specialize in digital
transformation, IT consulting, and solutions tailored for sectors like banking, retail, and industrial
automation.
4. Electrical and Automation: L&T provides solutions in electrical equipment, industrial automation,
and energy management. Their offerings include smart technology and sustainable automation
solutions for industries and infrastructure.
5. Financial Services: L&T Finance Holdings offers a comprehensive range of financial products,
encompassing infrastructure financing, rural and microfinance, and investment management
services.
6. Power and Power Transmission: This segment is involved in power generation, transmission, and
distribution, with a particular emphasis on renewable energy, focusing on solar and wind power
projects.

Sustainability and Corporate Social Responsibility (CSR)

L&T is focused on sustainability and social responsibility, weaving ESG (Environmental, Social, and
Governance) principles into its business operations. Key initiatives include:
• Green Infrastructure Projects: L&T is involved in renewable energy projects, such as solar and
hydropower plants.
• Water Conservation: The company supports water recycling, rainwater harvesting, and other
 sustainable water management practices.
• Skill Development Programs: L&T’s CSR initiatives emphasize vocational training, education, and
healthcare for disadvantaged communities throughout India.

Strategic Focus and Vision

L&T’s strategic focus is in tune with India’s increasing infrastructure demands and the worldwide
movement towards sustainable development. The company aims to:
• Lead the change in smart cities, urban infrastructure, and renewable energy.
• Grow its international presence by engaging in global megaprojects.
• Accelerate digital transformation within its operations, incorporating automation, AI, and machine
learning into its engineering processes.
• Enhance shareholder value through strategic investments in high-growth sectors and continuous
innovation in its business offerings.

Financial Statements of the Company:

1. Balance Sheets (As of last 5 years, 2020-24)

The balance sheet of Larsen & Toubro (L&T) from 2020 to 2024 indicates a consistent growth in assets,
along with a careful equilibrium between liabilities and equity. Shareholder funds have shown a steady
increase, which highlights strong retained earnings; however, there was a noticeable decline in reserves in
2024, suggesting potential challenges in profitability. Non-current liabilities, especially long-term
borrowings, have decreased, reflecting a commitment to reducing debt, while current liabilities have
increased due to a rise in short-term borrowings and operational obligations.
On the asset side, both tangible and non-current investments have grown, reflecting the company’s
commitment to infrastructure and strategic projects. However, the rise in trade receivables suggests slower
cash flow and increased credit risk.

2. Profit & Loss Statements (As of last 5 years, 2020-24)

Larsen & Toubro’s profit and loss statement indicates steady revenue growth over the past five years,
showcasing a strong expansion in its core operations. The company has been able to boost its profitability
by effectively controlling costs, even as operational expenses have increased alongside revenue. Their
investments in employee benefits demonstrate a commitment to expanding the workforce, which likely
supports their growth path.
Profit margins have generally improved, resulting in higher earnings per share and better returns for
shareholders. However, dividend payouts have been somewhat inconsistent, likely reflecting adjustments
based on cash flow requirements or financial strategy.

3. Cash Flow Statements (As of last 5 years, 2020-24)

Larsen & Toubro's cash flow statement over the last five years showcases its resilience during the COVID-
19 pandemic. Particularly in FY21, the company managed to generate strong cash flows from operating
activities, despite the tough circumstances, which highlights its effective cost management and operational
efficiency.
However, in the years that followed the pandemic, there were significant cash outflows in investing
activities, suggesting a strategic focus on capital investments aimed at recovery and growth. Additionally,
financing activities have shown considerable outflows, particularly post-pandemic, as the company seems
to have focused on debt repayment and returning value to shareholders to stabilize its financial position.
Ratio Analysis:

1. Profitability Ratios:

Return On Capital Employed(%)

18
15.26
16
13.15 13.33
14
11.06 11.48
12
10
8
6
4
2
0
2020 2021 2022 2023 2024

Return On Equity(%) - Shareholders Equity

or Proprietary Ratio
18.79
20
14.47
12.82 15
11.75 10.98
10

0
2020 2021 2022 2023 2024
 Net Profit Margin(%)
18
15.46
16
14
12
8.1 7.8 10
7.1 7.37
8
6
4
2
0
2020 2021 2022 2023 2024

Operating Profit Margin(%)

12
9.91
8.96 10
8.3 8.41
7.67
8
6
4
2
0
2020 2021 2922 2023 2024

Insights & Interpretation:

• Operating Profit Margin (OPM): The margin shows a slight decline from 9.91% in 2021 to 7.67%
in 2024. This reflects a drop in operational efficiency or an increase in costs when measured against
revenue.
• Net Profit Margin (NPM): The NPM dropped from 15.46% in 2021 to 7.37% in 2024, signalling
an increase in either operational costs or tax burdens. 2021 seems to be an outlier, due to the rise in
the pandemic and supply chain disruptions, accompanied with a blockade on the incoming projects.
• Return on Capital Employed (ROCE): ROCE improved from 11.06% in 2020 to 15.26% in 2024,
which reflects better profitability on the capital invested.
• Return on Equity (ROE): A steady improvement, reaching 14.47% in 2024, signals the company
is efficiently using shareholder equity to generate profit, though it was significantly higher in 2021
(18.79%).

The notable decline in profit margins, especially from 2021 to 2023, corresponds with the height of the
pandemic when various industries encountered increased costs, supply chain challenges, and fluctuating
demand. Throughout this time, companies worldwide dealt with diminished consumer demand, rising input
expenses, and disruptions in both manufacturing and logistics. Consequently, profit margins shrank even
as businesses tried to sustain their revenue.

Suggestion:

The decline in OPM and NPM suggests that costs are on the rise, possibly due to operational inefficiencies
or higher input costs. The company should:
• Reassess its cost structure to pinpoint areas where operational expenses can be reduced (for
example, overhead costs and supply chain inefficiencies).
• Emphasize improving pricing power, possibly by introducing product differentiation or value-added
services, enabling them to transfer cost increases to customers while maintaining sales levels.

2. Liquidity & Solvency Ratios:

Current Ratio
1.16 1.18 1.2
1.13
1.05
0.98 1

0.8

0.6

0.4

0.2

2020 2021 2022 2023 2024

Quick Ratio
1.49 1.5
1.45
1.4 1.4
1.34 1.35
1.31 1.3
1.25 1.25
1.2
1.15
1.1

2020 2021 2022 2023 2024

 Debt Equity Ratio
0.5 0.5

0.39 0.4
0.35
0.3 0.3
0.25
0.2

0.1

2020 2021 2022 2023 2024

Insights & Interpretation:

• Current Ratio: Slight decline from 1.16 in 2021 to 1.05 in 2024, asserting that the company is
maintaining sufficient short-term liquidity but needs to ensure further improvements.
• Quick Ratio: The quick ratio also decreased from 1.49 in 2020 to 1.25 in 2024, indicating the
company's inability to meet short-term obligations without relying on inventory.
• Debt to Equity Ratio: The debt-to-equity ratio improved from 0.50 in 2020 to 0.35 in 2024,
reflecting a more conservative financial structure with reduced dependency on debt.

During the pandemic, liquidity was pressured due to lengthened working capital cycles and delays in
receiving payments, resulting in cash flow constraints.

Suggestion:

• Focus on improving liquidity by optimizing working capital management and reducing the
dependency on external debt to avoid liquidity challenges in the future.

3. Turnover Ratios (Management Efficiency Ratios):

 Inventory Turnover Ratio
40
35.85 35
32.24 32.23
29.74 30
25.65 25
20
15
10
5
0

2020 2021 2022 2023 2024

Asset Turnover Ratio

1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

2020 2021 2022 2023 2024

Insights & Interpretation:

• Inventory Turnover Ratio: Improved significantly from 29.74 in 2020 to 35.85 in 2024, pointing
to better inventory management and improved sales.
• Debtors Turnover Ratio: The ratio has shown growth from 2.53 in 2021 to 3.60 in 2024,
suggesting improvements in collections from customers.
• Total Assets Turnover Ratio: Increased from 0.87 in 2021 to 1.46 in 2024, reflecting more
efficient utilization of assets to generate revenue.

Suggestion:

• While inventory turnover has improved, the company should focus on further improving its debtor
collection period to ensure faster conversion of receivables into cash and maintain efficient asset
utilization.

Conclusion:

The company's profitability ratios have demonstrated resilience but have encountered challenges over the
years, especially regarding Operating Profit Margin (OPM) and Net Profit Margin (NPM). The decline in
these margins from 2021 to 2024 indicates rising operational costs and inefficiencies, which may be
attributed to increased input prices or challenges following the pandemic. Nevertheless, the company has
succeeded in enhancing its Return on Capital Employed (ROCE) and Return on Equity (ROE), indicating
that capital allocation and returns to shareholders are still strong. To ensure sustainable long-term growth,
the company should focus on improving operational efficiency, cutting costs, and boosting pricing power
to safeguard its margins.

Regarding liquidity and solvency ratios, the company has shown stability with a healthy debt-to-equity
ratio. However, liquidity ratios like the current and quick ratios have seen a slight decline. It will be essential
to strengthen cash management and optimize working capital to maintain financial flexibility and to ensure
the availability of cash on demand for any contingencies at the company. Additionally, turnover ratios
indicate effective management, with improvements in inventory and debtor turnover, but further tightening
in collection cycles and asset utilization could unlock more value. Overall, focusing on cost control,
improving liquidity, and maintaining efficient asset management will set the company up for future growth.

References:

[1] https://www.moneycontrol.com/financials/larsen&toubro/balance-sheetVI/LT#LT
[2] https://www.moneycontrol.com/stocks/company_info/print_main.php
[3] https://www.moneycontrol.com/stocks/company_info/print_main.php
[4] https://www.investopedia.com/terms/r/ratioanalysis.asp
[5] https://corporatefinanceinstitute.com/resources/accounting/analysis-of-financial-statements/
[6] https://www.lntecc.com/
[7] https://en.wikipedia.org/wiki/Larsen_%26_Toubro