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L&T: Slow yet steady - Views on News from Equitymaster
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L&T: Slow yet steady
Jan 30, 2009

Performance summary
  • Standalone net sales grow by a 35% YoY during 3QFY09. Growth aided by a 54% YoY growth in sales of the engineering and construction. The segmentís order backlog at the end of December 2008 stood at Rs 670 bn (almost 3 times the segmentís FY08 sales), comprising 15% of international orders.
  • EBIDTA margins contract by 1.1% YoY during the quarter on the back of higher sub-contracting charges, construction materials costs and marginally higher staff costs (as percentage of sales).
  • Net profits grow by 25% YoY during 3QFY09, although it remains lower as compared to topline growth on account of the drop in operating margins and substantially higher interest expenses.
  • Extraordinary gain of Rs 9,163 m on the sale of ready mix concrete business during 3QFY09.


Financial performance snapshot (Standalone)
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 63,827 85,940 34.6% 163,878 231,776 41.4%
Expenditure 57,483 78,357 36.3% 146,961 210,691 43.4%
Operating profit (EBDITA) 6,344 7,582 19.5% 16,918 21,085 24.6%
Operating profit margin (%) 9.9% 8.8% 10.3% 9.1%
Other income 1,567 3,288 109.8% 3,436 6,704 95.1%
Interest 438 975 122.5% 728 2,048 181.3%
Depreciation 527 781 48.2% 1,434 2,171 51.3%
Profit before tax 6,946 9,114 31.2% 18,191 23,571 29.6%
Tax 2,128 3,073 44.4% 6,124 7,903 29.0%
Profit after tax/(loss) 4,818 6,041 25.4% 12,067 15,668 29.8%
Extraordinary Item - 9,163 - 9,163
Net profit 4,818 15,204 215.6% 12,067 24,831 105.8%
Net profit margin (%) 7.5% 17.7% 7.4% 10.7%
No. of shares 291.8 585.4
Diluted earnings per share (Rs)* 43.3
P/E ratio (x)* 15.9
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • L&Tís sales for the quarter have grown by a 35% YoY during 3QFY09, aided by a 54% YoY growth in sales of the engineering and construction segment (which constituted 85% of the total sales during the quarter). This segment had an order inflow of Rs 134 bn during the quarter, up 17% YoY. The electrical and electronics segment saw a lackluster 5% YoY growth in sales due to the effect of the credit crunch and deferment of expenditure by the building and industrial sectors which dampened the demand for the L&Tís electrical products.

    Segment-wise performance (Standalone)
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Engineering & Construction
    Revenue 49,656 76,326 53.7% 127,201 191,651 50.7%
    % share 75.8% 85.0% 74.6% 80.0%
    EBIT margin 11.4% 10.4% 10.4% 10.3%
    Electrical & Electronics
    Revenue 6,157 6,469 5.1% 18,285 19,850 8.6%
    % share 9.4% 7.2% 10.7% 8.3%
    EBIT margin 15.6% 10.5% 15.5% 11.0%
    Machinery & Industrial Products
    Revenue 5,896 5,293 -10.2% 16,040 18,474 15.2%
    % share 9.0% 5.9% 9.4% 7.7%
    EBIT margin 19.6% 12.5% 18.2% 18.9%
    Others
    Revenue 3,815 1,756 -54.0% 9,058 9,536 5.3%
    % share 5.8% 2.0% 5.3% 4.0%
    EBIT margin 4.7% 6.6% 5.1% 6.1%
    Total*
    Revenue 65,523 89,844 37.1% 170584 239510.6
    EBIDTA margin 12.2% 10.5%
    * Excluding inter-segment adjustments

  • L&Tís operating margins contracted by 1.1% YoY during the quarter on the back of higher sub-contracting charges, construction materials costs and marginally higher staff costs (all as percentage of sales). Segment wise, all the three major segments of E&C, electrical and electronics and machinery & industrial products saw contraction in PBIT margins. The margins for the electrical and electronics division were down due to lower volumes, under-utilisation of capacity and competitive pressures leading to lower realisations.

  • Net profit grew by 25% YoY during 3QFY09, although it remained lower as compared to topline growth on account of the drop in operating margins and substantially higher interest expenses due to higher borrowings. L&T had extraordinary gain of Rs 9,163 m on the sale of its ready mix concrete business during 3QFY09.

What to expect?
At the current price of Rs 700, the stock is trading at a multiple of 9.3 times our estimated FY11 consolidated earnings. L&T managed to secure an order inflow of Rs 146 bn during the quarter compared to an order inflow of Rs 130 bn in 3QFY08. Its share of sales from the international businesses increased to almost 19% during the quarter, thus moving closer towards its goal of 25% sales from international operations. As per the management, the capital goods industry is expected to grapple with the impact of slowdown which is likely to continue through 2009Ė2010. It is however upbeat about the companyís foray into the railway business which has already resulted in a few important orders. Also its focus on expanding its business in the nuclear power sector is expected to stand it in good stead over the long term. We maintain a positive view on the companyís core business. However, we will still await clarity on the companyís buyout plans for the fraud-hit Satyam Computers before finalising our view on the stock.

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