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L&T: E&C business disappoints
Jan 21, 2010

Performance summary
  • Standalone net sales fall by a 6.1% YoY during 3QFY10. Fall led by a 9% YoY decline in sales of the companyís engineering and construction (E&C) segment.
  • EBIDTA margins expand by 1.4% YoY during the quarter on the back of lower raw material and construction materials costs (as percentage of sales).
  • Excluding extraordinary items, net profits grow by 16.6% YoY during 3QFY10, a better performance compared to the topline on account of the expansion in operating margins and as also lower interest expenses.
  • Extraordinary gain during the quarter of Rs 626 m due to a proportionate reversal of the provision made in previous year on company's investment in Satyam Computer Services Limited (SCSL).

Financial performance snapshot (Standalone)
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 85,940 80,714 -6.1% 231,776 233,003 0.5%
Expenditure 76,980 71,153 -7.6% 209,177 207,642 -0.7%
Operating profit (EBDITA) 8,960 9,561 6.7% 22,599 25,361 12.2%
Operating profit margin (%) 10.4% 11.8%   9.8% 10.9%  
Other income 3,304 2,844 -13.9% 6,829 8,091 18.5%
Interest 2,369 1,339 -43.5% 3,686 3,698 0.3%
Depreciation 781 1,045 33.8% 2,171 2,984 37.5%
Profit before tax 9,114 10,020 9.9% 23,571 26,771 13.6%
Tax 3,073 3,058 -0.5% 7,903 8,495 7.5%
Profit after tax/(loss) 6,041 6,963 15.3% 15,668 18,276 16.6%
Extraordinary Item 9,163 626   9,163 11,098  
Net profit 15,204 7,588 -50.1% 24,831 29,374 18.3%
Net profit margin (%) 7.0% 9.4%   6.8% 12.6%  
No. of shares       585.4 600.3  
Diluted earnings per share (Rs)*#         49.5  
P/E ratio (x)*         30.8  
* On a trailing 12-months basis   # Excluding extraordinary items

What has driven performance in 3QFY10?
  • L&Tís sales for the quarter have fallen by 6% YoY during 3QFY10, led by a 9% YoY decline in sales of the companyís engineering and construction (E&C) segment (which constituted around 83% of the total sales during the quarter). The electrical and electronics segment saw a comparatively better quarter, with revenues higher by about 11% YoY. The machinery and industrial products segment too saw a growth of 11% YoY during the quarter.

    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Engineering & Construction            
    Revenue 76,698 69,980 -8.8% 192,698 204,240 6.0%
    % share 85.0% 83.3%   80.1% 84.3%  
    EBIT margin 11.2% 12.2%   10.7% 11.0%  
    Electrical & Electronics            
    Revenue 6,477 7,214 11.4% 19,878 20,060 0.9%
    % share 7.2% 8.6%   8.3% 8.3%  
    EBIT margin 12.3% 12.1%   11.8% 13.0%  
    Machinery & Industrial Products            
    Revenue 5,318 5,911 11.1% 18,545 15,376 -17.1%
    % share 5.9% 7.0%   7.7% 6.3%  
    EBIT margin 14.3% 20.4%   19.5% 20.1%  
    Others            
    Revenue 1,758 954 -45.7% 9,541 2,648 -72.2%
    % share 1.9% 1.1%   4.0% 1.1%  
    EBIT margin 7.8% 21.5% 6.4% 16.0%  
    Total*            
    Revenue 90,250 84,058 -6.9% 240,662 242,324  
    EBIDTA margin 11.4% 12.9%   11.3% 11.8%  
    * Excluding inter-segment adjustments

  • L&Tís operating margins expanded by 1.4% YoY during the quarter on the back of lower raw material and construction materials costs (as percentage of sales). Segment wise, all the three major segments of E&C, electrical and electronics and machinery & industrial put up a good show on the PBIT margins front.

  • Excluding extraordinary items, net profits grew by about 15% YoY during 3QFY10, higher when compared to topline growth. This is on the back of an expansion in operating margins and substantially lower interest expenses. L&T had an extraordinary gain of Rs 626 m on reversal of the provision made in previous year on company's investment in Satyam Computer Services Limited (SCSL).

What to expect?
At the current price of Rs 1,524, the stock is trading at a multiple of 18.2 times our estimated FY12 consolidated earnings. From its earlier guidance of 15% sales growth that the company had given at the end of the September 2009 quarter, it has now lowered the same to about 10% YoY for the full year. Despite our conservative estimates on this front, the company has underperformed our sales estimates.

As per the companyís management, the sales were negatively impacted by a number of issues, mainly execution related. Execution of various projects went through rough patches during the quarter leading to consequent delays. Delays in handing over of project sites, delays in financial closures, funds not being put up by customers during execution were just some of the factors that led to the dismal sales performance during the quarter. The management has indicated that most bottlenecks have now been overcome.

The execution issues that have cropped up during the quarter vindicate the skepticism we have shown with respect to the stockís high valuations. We continue to have a negative view on the stock over concerns related to the high valuation that it is currently trading at.

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