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L&T: True to its stature - Views on News from Equitymaster
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L&T: True to its stature
Jan 28, 2008

Performance summary
  • Standalone sales grow 55% YoY in 3QFY08, 45% YoY in 9mFY08. Growth led by strong performance from the engineering and construction (E&C) segment.

  • Higher construction material costs have led to contraction in operating margins. Margins would have been lower but for decline in raw material and staff costs (both as percentage of sales).

  • Net profits grow 40% YoY during 3QFY08, 72% YoY during 9mFY08. Lower other income, higher interest and depreciation expenses take some sheen off the net profits.

  • E&C order backlog stood at Rs 476 bn at the end of December 2007 (3.5 times segment sales in FY07).

Standalone performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 41,157 63,827 55.1% 113,223 163,878 44.7%
Expenditure 36,597 56,924 55.5% 103,859 146,882 41.4%
Operating profit (EBDITA) 4,560 6,903 51.4% 9,364 16,997 81.5%
Operating profit margin (%) 11.1% 10.8% 8.3% 10.4%
Other income 1,088 1,009 -7.3% 3,007 3,357 11.6%
Interest 125 438 249.9% 699 728 4.2%
Depreciation 357 527 47.7% 1,002 1,434 43.1%
Profit before tax 5,166 6,946 34.5% 10,671 18,191 70.5%
Tax 1,727 2,128 23.3% 3,648 6,124 67.9%
Profit after tax/(loss) 3,439 4,818 40.1% 7,023 12,067 71.8%
Net profit margin (%) 8.4% 7.5% 6.2% 7.4%
No. of shares 286.8
Diluted earnings per share (Rs)* 66.5
P/E ratio (x)* 57.4
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • L&Tís E&C division, which forms around 76% of the companyís total revenues, was the lead growth driver during 3QFY08. This segment recorded a sales growth of 57% YoY during the quarter. This growth was aided by the ongoing execution of some large-scale projects like the Delhi airport, captive power plant for naphtha cracker project for IOC, construction of port facilities, embarkment, bridges, jetty and township including railway electrification and water system works at Dhamra Port, Orissa for The Dhamra Port Company Limited and engineering, procurement, installation and commissioning for 2 new offshore platform, a flare platform and interconnecting bridge for block 5 development in Qatar for Maersk Oil Qatar AS.

    At the end of December 2007, the order backlog for the E&C segment stood at Rs 476 bn, almost 3.5 times the segmentís FY07 revenues. During the quarter, some of the large contracts that L&T won in this segment include:

    • US$ 110 m contract from Muscat Golf Course project LLC;

    • Rs 2.8 bn elevated access road contract to Mumbai International Airport from MMRDA;

    • Rs 2.8 bn contract tunneling contract from Delhi Metro Rail Corporation;

    • Rs 3.6 bn order from SAILís Bokaro steel plant for rebuilding blast furnace;

    • Rs 7 bn order from IOC for process plants.

    Segment-wise performance (Standalone)
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Engineering & Construction
    Revenue 31,605 49,625 57.0% 82,314 127,170 54.5%
    % share 73.2% 75.8% 71.7% 74.6%
    EBIT margin 10.3% 11.5% 9.0% 10.4%
    Electrical & Electronics
    Revenue 4,825 6,157 27.6% 13,739 18,285 33.1%
    % share 11.2% 9.4% 12.0% 10.7%
    EBIT margin 14.7% 15.5% 15.4% 15.5%
    Machinery & Industrial Products
    Revenue 4,066 5,896 45.0% 11,789 16,040 36.1%
    % share 9.4% 9.0% 10.3% 9.4%
    EBIT margin 13.6% 19.7% 15.0% 18.2%
    Others
    Revenue 2,683 3,815 42.2% 6,917 9,058 30.9%
    % share 6.2% 5.8% 6.0% 5.3%
    EBIT margin 3.1% 4.7% 7.0% 5.1%

    As for the companyís electrical and electronics (E&E) business, sales grew 28% YoY during the third quarter. The Machinery & Industrial Products (MIP) business recorded sales growth of 45% YoY during the quarter as robust demand from industrial, infrastructure and hydrocarbons sectors led growth for the companyís construction and mining equipments.

  • L&Tís operating margins contracted by a marginal 30 basis points (0.3%) during 3QFY08. This was largely to a rise in expenses incurred on procuring construction materials. These expenses increased from 16.7% of the companyís sales in 3QFY07 to 22.2% in 3QFY08. Based on segments, all of them recorded improvement in their EBIT margins, with special mention due for the MIP business, where margins expanded from 13.6% in 3QFY07 to 19.7% in 3QFY08.

  • Lower other income and higher interest and depreciation expenses pared L&Tís bottomline growth during 3QFY08. While other income declined by 7% YoY, interest and depreciation costs increased by 250% YoY and 48% YoY respectively.

  • L&Tís subsidiaries continue to do well. While the IT subsidiary, L&T Infotech recorded 19% YoY and 28% YoY growth in sales and PAT respectively during 9mFY08, L&T Finance recorded growth of 135% YoY and 114% YoY respectively.

What to expect?
At the current price of Rs 3,830, the stock is trading at a multiple of 19.2 times our estimated FY10 consolidated earnings. We believe that L&Tís leadership position in the construction, projects and manufacturing-led businesses holds good potential for growth in the future. Also, a healthy backlog provides it the right kind of visibility in terms of future performances. We shall soon update our research report on the company, given the better than expected performance for the first nine-months of this fiscal. We maintain our positive view on the stock from a long-term perspective.

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