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L&T: Order inflow up 21% YoY - Views on News from Equitymaster
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L&T: Order inflow up 21% YoY
Jan 22, 2014

Larsen & Toubro (L&T) has announced the third quarter results of financial year 2013-2014 (3QFY14). The company has reported 11.8% YoY and 12.1% YoY growth in sales and recurring profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 11.8% YoY during 3QFY14.
  • Operating profits increase 33.1% YoY in 3QFY14. As a result, operating margins improve to 11.6% during the quarter.
  • Recurring profits increase by 12.1 % YoY during the quarter. Strong performance at the operating level boosted bottomline growth.
  • The company registered an order inflow of Rs 217.2 bn during the quarter, a growth of 21% YoY. The total order book at the end of the quarter stood at Rs 1,711.8 bn.
  • Subsequent to a scheme of arrangement, the Hydrocarbon business of the company is transferred to its wholly owned subsidiary. As a result, prior year results have been restated to exclude the performance of the hydrocarbon business. The net profit/loss from the disposal of the business is shown separately under the head discontinued operations.
  • During 3QFY14, the company issued 0.8 m equity shares on exercise of stock options by its employees.
  • Gross D/E at the end of the quarter stood at 0.38x
  • Out of the total order book of Rs 1,711.8 bn – 76% belongs to the infrastructure segment, 9% to the power segment, 8% to metallurgical and material handling segment, 4% to heavy engineering segment with the balance being constituted by others.

Financial performance snapshot (Standalone)
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 128,693 143,875 11.8% 334,905 365,198 9.0%
Expenditure 116,111 127,127 9.5% 301,973 327,676 8.5%
Operating profit (EBDITA) 12,583 16,748 33.1% 32,933 37,522 13.9%
Operating profit margin (%) 9.8% 11.6%   9.8% 10.3%  
Other income 5,595 4,468 -20.1% 15,485 13,995 -9.6%
Interest 2,338 2,909 24.4% 6,914 7,712 11.5%
Depreciation 1,779 1,992 12.0% 5,309 5,786 9.0%
Profit before tax 14,061 16,316 16.0% 36,194 38,019 5.0%
Tax 3,929 4,953 26.1% 10,740 11,367 5.8%
Exceptional items - 1,044 NA 1,762 1,044 -40.8%
Extraordinary items - - NA 529 - -100.0%
Profit/loss from discontinued operations 1,085 - -100.0% 3,481 - -100.0%
Reported profit after tax/(loss) 11,218 12,407 10.6% 31,227 27,697 -11.3%
Recurring profit adjusted for extraordinary & exceptional items # 10,132 11,363 12.1% 25,454 26,653 4.7%
Adjusted net profit margin (%) 8.7% 8.6%   9.3% 7.6%  
No. of shares         926.1  
Basic recurring earnings per share (Rs)         29.9  
P/E ratio (x)*         20.4  
* Recurring P/E on a trailing 12-months basis
# Equitymaster adjustments

What has driven performance in 3QFY14?
  • L&T's sales growth was aided by strong growth in 'Infrastructure' segment (+21.5% YoY) and 'Heavy Engineering' (+22.2% YoY) segment. However, muted growth was reported in 'Power' (-30.3% YoY), and 'Metallurgical and Material Handling' (-5.6% YoY) segments. 'Machinery & Industrial Products' too reported a negative growth of 25.8% YoY.

  • Revenue growth from the infrastructure segment was boosted by strong momentum in urban infra and transportation infra. Water and Power T&D also supported the overall growth in revenues. Margins from the segment improved 1.3% YoY due to improvement in execution.

  • Revenues from the power segment were impacted due to declining order book while margins eroded in 3QFY14 due to capacity under-utilization.

  • Growth in the operating profit came in at 33.1% in 3QFY14. Segment wise, EBIT margins improved in Infrastructure, Heavy Engineering and Electrical Automation segments. The increase in margin was a result of execution efficiency. On the other hand, Power, Machinery & Industrial Products and Metallurgical & Material Handling segments reported decline in EBIT margin. Poor performance at EBIT level for these segments was attributed to capacity under utilization, job mix, cost provisioning and drop in sales.

  • Recurring profit after tax increased by 12.1% YoY in 3QFY14. Strong performance at the operating level boosted bottomline growth. The Hydrocarbon business was demerged and transferred to L&T's wholly owned subsidiary during the quarter. As such, the prior period results have been adjusted to exclude the contribution of erstwhile hydrocarbon business.

    Segment-wise performance (Standalone)
      3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Infrastrcuture
    Revenue 73,346 89,085 21.5% 173,138 215,758 24.6%
    % share 54% 60%   49% 57%  
    EBIT margin 9.0% 10.3%   9.5% 10.7%  
    Power 
    Revenue 17,383  12,116 -30.3%  59,949 36,677 -38.8%
    % share 13% 8%   17% 10%  
    EBIT margin 6.4% 5.4%   7.6% 8.5%  
    Metallurgical & Material Handling 
    Revenue 16,479  15,556 -5.6%  44,217 37,581 -15.0%
    % share 12% 11%   13% 10%  
    EBIT margin 15.0% 14.1%   13.4% 13.8%  
    Heavy Engineering 
    Revenue 8,585 10,495 22.2% 20,437 29,645 45.1%
    % share 6% 7%   6% 8%  
    EBIT margin 12.0% 14.9%   16.5% 13.9%  
    Electrical Automation 
    Revenue 8,865 10,028 13.1%  25,271 27,472 8.7%
    % share 6.6% 6.8%   7.2% 7.3%  
    EBIT margin 11.1% 11.6%   8.4% 9.8%  
    Machinery & Industrial Products 
    Revenue 5,932  4,403 -25.8%  16,507  14,866 -9.9%
    % share 4.4% 3.0%   4.7% 4.0%  
    EBIT margin 27.1% 13.2%   18.1% 11.1%  
    Others 
    Revenue 4,239  5,743 35.5% 11,431  14,211 24.3%
    % share 3.1% 3.9%   3.3% 3.8%  
    EBIT margin 29.0% 16.0%   21.6% 0.5%  
    Total*
    Revenue 134,829 147,426 9.3% 350,950 376,210 7.2%
    * Excluding inter-segment adjustments & excise duty
What to expect?
At the current stock price of Rs 1,005 the stock is trading at a multiple of 20.4x its TTM earnings. During the quarter, L&T recorded order inflow of Rs 217.2 bn, up 21% YoY, despite weak economic climate. The order book stood at Rs 1,711.8 bn with international orders constituting 15% of the order book. For the full year, management reiterated its inflow guidance of 15-20% with a cautiously optimistic view. The urban infrastructure segment does not attract heavy competition and L&T seized a sizable amount of orders from this space in 3QFY14. If the trend persists in the next quarter, weakness in order inflows from other sectors namely power and metals will be compensated.

Amidst improved execution in the infrastructure segment management maintained its full year top-line growth guidance at 15%. However, concerns with respect to working capital have emanated in this quarter. The net working capital as a percentage of sales breached 20% mark for the quarter. Lower customer advances and extension of vendor credit stretched the working capital cycle.

With respect to the concessionaire business, it may be noted that the premium rescheduling request is still pending with NHAI. If that happens it shall ease cash flow concerns. Given the near term uncertainty in infrastructure, industrial and power segments, we maintain our HOLD view on the stock. We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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