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L&T: Robust set of results
Jan 23, 2012

Larsen & Toubro (L&T) has announced the third quarter results of financial year 2011-2012 (3QFY12). The company has reported 22.8% YoY and 18.0% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 22.8% YoY during 3QFY12.
  • Operating margins fall to 9.6% YoY in 3QFY12. However, operating profits increase 9.5% YoY during the quarter.
  • Net profits increase by 18.0% YoY during the quarter.
  • The company registered an order inflow of Rs 171.3 bn during the quarter, taking the order book to Rs 1,457.6 bn as of 3QFY12.

Financial performance snapshot(Standalone)
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 113,958 139,986 22.8% 286,491 347,264 21.2%
Expenditure 101,693 126,555 24.4% 254,070 310,868 22.4%
Operating profit (EBDITA) 12,264 13,431 9.5% 32,421 36,397 12.3%
Operating profit margin (%) 10.8% 9.6%   11.3% 10.5%  
Other income 2,508 4,487 78.9% 8,464 11,081 30.9%
Interest 1,678 1,907 13.6% 4,930 5,450 10.5%
Depreciation 1,281 1,803 40.8% 3,635 5,191 42.8%
Profit before tax 11,813 14,208 20.3% 32,321 36,836 14.0%
Tax 3,760 4,292 14.1% 10,666 11,475 7.6%
Extraordinary items, net of tax 353 -   1,061    
Profit after tax/(loss) 8,405 9,915 18.0% 22,717 25,361 11.6%
Net profit margin (%) 7.4% 7.1%   7.9% 7.3%  
No. of shares         611.8  
Basic reported earnings per share (Rs)*         41.45  
P/E ratio (x)*         18.5  
* On a trailing twelve month basis

What has driven performance in 3QFY12?
  • L&T grew its standalone sales by around 22.8% YoY during 3QFY12. This was on the back of a 24.9% YoY growth in the company's Engineering & Construction (E&C) division, well supported by 5.7% YoY growth each from Electrical and Electronics (E&E) division and Machinery & Industrial products (M&I) division. Revenues from the E&C division were supported by healthy execution. However, sluggish international demand resulted in a modest revenue growth from the E&E segment. While the segmental margins from the E&C division were relatively flat (30 bps erosion on a YoY basis) the E&E segment witnessed a fall in margins due to stiff competition.

    Segment-wise performance (Standalone)
    (Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Engineering & Construction            
    Revenue 99,833 124,654 24.9% 246,840 302,861 22.7%
    % share 86% 87%   84% 85%  
    EBIT margin 10.6% 10.3%   11.2% 10.3%  
    Electrical & Electronics            
    Revenue 7,968 8,426 5.7% 22,104 24,362 10.2%
    % share 7% 6%   8% 7%  
    EBIT margin 10.9% 8.5%   11.2% 8.4%  
    Machinery & Industrial Products            
    Revenue 6,809 7,198 5.7% 19,272 20,882 8.4%
    % share 6% 5%   7% 6%  
    EBIT margin 18.9% 18.1%   18.5% 17.2%  
    Others            
    Revenue 1,696 2,670 57.5% 4,506 6,881 52.7%
    % share 1% 2%   2% 2%  
    EBIT margin 12.6% 25.4%   16.0% 22.9%  
    Total*            
    Revenue 116,306 142,948 22.9% 292,723 354,986 21.3%
    * Excluding inter-segment adjustments & excise duty

  • L&T's operating margins declined by 120 bps during the quarter. Operating expenditure increased due to increase in staff cost, SG&A cost and other manufacturing cost (as a percentage of sales). Addition of manpower and compensation restructuring saw staff cost rise from 6.0% in 3QFY11 to 6.3% in 3QFY12. SG&A expenses increased from 4.5% in 3QFY11 to 5.3% in 3QFY12 due to mark-to market (MTM) provisions. However, the total raw material expenses (including stock adjustments and traded goods) declined from 72.4% in 3QFY11 to 71.4% in 3QFY12 due to pass through of commodity price inflation.

  • Overall, the company garnered fresh orders to the tune of Rs 171.2 bn, a growth of 28% YoY during the quarter. It may be noted that the company managed to garner orders from infrastructure and power sector despite a slowdown in these sectors. At the end of December 2011, L&T had an order backlog of Rs 1,457.6 bn.

  • L&T's profits grew by 18% YoY during 3QFY12 due to rise in other income which increased due to dividends received from subsidiaries and treasury earnings. However, depreciation and interest expenses increased 40.8% and 13.6% YoY.

What to expect?
Taking into consideration the current macro-environment order inflows from the E&C segment would remain a key. However, uptick in transmission & distribution (T&D) spend amidst slowdown in the EPC segment will provide cushion to the order book. Emerging prospects from the hydrocarbons and infrastructure sector also appear bright. However, margin concerns amidst significant raw material price inflation remain. Even the working capital cycle increased due to inventory and receivables build up. However, considering the diversified nature of the order book and future growth prospects, we maintain our positive view on the stock.

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