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L&T: Margins take a hit
Jan 17, 2011

L&T declared its 3QFY11 results. The company has reported 40% YoY growth in sales while its net profits have grown 11% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 40% YoY during 3QFY11. This was primarily driven by the 42% increase in sales of the engineering and construction segment.
  • Order inflows declined by 25% YoY during the quarter. Order inflows for the quarter stood at Rs 134 bn. Order backlog at the end of December 2010 stood at Rs 1.14 trillion, up 26% YoY.
  • During 3QFY11, the raw material cost doubled as compared to 3QFY10. Resultantly, the operating margins came under pressure.
  • Excluding extraordinary items, net profits increase by 16% YoY during the quarter.


Financial performance snapshot (Standalone)
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 80,714 113,217 40.3% 233,003 284,175 22.0%
Expenditure 71,388 101,752 42.5% 207,687 253,513 22.1%
Operating profit (EBDITA) 9,326 11,465 22.9% 25,316 30,662 21.1%
Operating profit margin (%) 11.6% 10.1%   10.9% 10.8%  
Other income 3,079 3,386 10.0% 8,136 10,405 27.9%
Interest 1,339 1,757 31.2% 3,698 5,112 38.3%
Depreciation 1,045 1,281 22.6% 2,984 3,635 21.8%
Extraordinary items 626 353   11,098 1,061  
Profit before tax 10,646 12,166 14.3% 37,869 33,382 -11.8%
Tax 3,058 3,760 23.0% 8,495 10,666 25.6%
Profit after tax/(loss) 7,588 8,405 10.8% 29,374 22,717 -22.7%
Net profit margin (%) 9.4% 7.4%   12.6% 8.0%  
No. of shares#       600.3 607.8  
Diluted earnings per share (Rs)*         57.6  
P/E ratio (x)*^         29.4  
* On a trailing 12-months basis   ^Excluding extraordinary items

What has driven performance in 3QFY11?
  • L&T grew its standalone sales by around 40% YoY during 3QFY11. This growth was on the back of a 42% YoY growth in the company's E&C division (86% of total sales during the quarter) as well as a 77% YoY growth in the integrated engineering services division. The growth in the former was mainly because of the power orders that started contributing to the revenues in a significant manner. The Boiler-Turbine-Generator (BTG) orders have started contributing to the revenue from this quarter. The quarter also saw a pickup in infrastructure and power orders under execution. On the other hand, the sharp growth in the integrated engineering services was on account of low base as the segment contributed just over 1% of the total sales.

    Segment-wise performance (Standalone)
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Engineering & Construction            
    Revenue 70,250 100,041 42.4% 204,370 246,517 20.6%
    % share 83% 86%   84% 84%  
    EBIT margin 12.2% 10.6%   11.0% 11.3%  
    Electrical & Electronics            
    Revenue 7,182 7,950 10.7%  19,982 22,125 10.7%
    % share 9% 7%   8% 8%  
    EBIT margin 12.2% 10.9%   13.1% 11.2%  
    Machinery & Industrial Products            
    Revenue 5,910 6,807 15.2% 15,376 19,271 25.3%
    % share 7% 6%   6% 7%  
    EBIT margin 20.4% 18.9%   20.1% 18.5%  
    Others            
    Revenue 950 1,681 76.9% 2,641 4,494 70.2%
    % share 1% 1%   1% 2%  
    EBIT margin 21.6% 12.7%   16.0% 16.1%  

  • L&T's operating margins contracted by 1.4% as all operating segments saw a drop in profitability. Margins were affected adversely because of the spike in the input costs and competitive pricing pressure. It is the rising commodity prices that took a significant toll on the earnings. This was the primary reason for the subdued growth (as compared to sales growth) of 16% in net profit during the quarter.

  • Overall, the company's order inflows declined by 25% YoY during the quarter. Deferment in award decisions was a cause. The order inflows were also marred by land acquisition and environmental clearances for clients in certain metals and hydrocarbons projects. Power business continues to dominate both the order inflows as well as the order backlog. At the end of December 2010, L&T had an order backlog of Rs 1.14 trillion, up 26% YoY.

  • Excluding extraordinary items, L&T's profits grew by 16% YoY during 3QFY11. The net profit margins declined by 1.5%, to 7.1% as compared to the corresponding quarter last year. It is the higher commodity prices that played the spoilsport leading to depressed bottomline.

What to expect?
At the current price of Rs 1,680, the stock is trading at a multiple of 19 times our estimated FY13 consolidated earnings. The management remains optimistic about the company’s prospects. It expects the deferred award of orders to start coming into the kitty. It is taking steps to improve margins and there are efforts to pass the increase in cost to the customers. We maintain our cautious view on the stock on account of its high valuations (ResearchPro subscribers, kindly click here)

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