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L&T: Profits jump on exceptional gains
May 19, 2011

Larsen & Toubro (L&T) has announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported 13.3% YoY and 17.3% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 13.3% YoY during 4QFY11.
  • Order backlog at the end of March 2011 stood at Rs 1.30 trillion.
  • During 4QFY11, the operating margins were relatively flat at 15.2%.
  • Net profits increase by 17.3% YoY during the quarter.


Financial performance snapshot (Standalone)
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 135,833 153,842 13.3% 370,348 439,049 18.6%
Expenditure 115,322 130,434 13.1% 322,193 382,823 18.8%
Operating profit (EBDITA) 20,510 23,409 14.1%  48,156  56,226 16.8%
Operating profit margin (%) 15.1% 15.2%   13.0% 12.8%  
Other income 3,299 3,698 12.1%  9,103 11,949 31.3%
Interest 1,356 1,362 0.4% 5,053 6,474 28.1%
Depreciation 1,162 2,358 102.9%  4,146  5,992 44.5%
Exceptional items  272 2,268 733.1%  10,748  2,621 -75.6%
Profit before tax 21,563 25,655 19.0% 58,807 58,329 -0.8%
Tax 7,914  8,793 11.1%  16,409 19,459 18.6%
Extraordinary items, net of tax  732      -     1,357  708 -47.8%
Profit after tax/(loss) 14,381 16,862 17.3%  43,755 39,579 -9.5%
Net profit margin (%) 10.6% 11.0%   11.8% 9.0%  
No. of shares         608.9  
Basic reported earnings per share (Rs)*         65.0  
P/E ratio (x)*         24.5  
* On a trailing 12-months basis

What has driven performance in 4QFY11?
  • L&T grew its standalone sales by around 13.3% YoY during 4QFY11. This was on the back of a 12.9% YoY growth in the company's Engineering & Construction (E&C) division (87% of total sales during the quarter) as well as a 27% YoY growth in the Machinery and Industrial products division. Execution uptick in power, infrastructure, hydrocarbons and long gestation boiler, turbine & generator (BTG) projects contributed to the overall top-line growth.

  • Growth in the Machinery & Industrial products was aided by higher demand from construction, mining and industrial sectors. However, Electrical & Electronics segment reported muted growth due to stiff competition and sluggish international demand.

    Segment-wise performance (Standalone)*
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Engineering & Construction
    Revenue 121,076 136,643 12.9% 323,158 382,187 18.3%
    % share 87% 87%   85% 85%  
    EBIT margin 15.3% 14.6%   12.7% 12.5%  
    Electrical & Electronics
    Revenue 9,883 10,014 1.3% 29,865 32,139 7.6%
    % share 7% 6%   8% 7%  
    EBIT margin 13.4% 15.2%   13.2% 12.4%  
    Machinery & Industrial Products
    Revenue 6,819 8,661 27.0% 22,195 27,931 25.8%
    % share 5% 6%   6% 6%  
    EBIT margin 21.0% 20.0%   20.4% 19.0%  
    Others
    Revenue 1,005 2,105 109.5% 3,646 6,604 81.2%
    % share 1% 1%   1% 1%  
    EBIT margin 2.0% 21.8%   12.2% 17.9%  
    * Excluding inter segment adjustments

  • L&T's operating margins witnessed a marginal improvement during the quarter despite commodity price inflation due to astute cost management. Operating expenditure as a percentage of sales declined from 84.9% in 4QFY10 to about 84.8% in 4QFY11. Staff cost increased from 4.5% (as a percentage of net revenues) to 5.3% due to increase in headcount and remuneration. In addition selling & administrative costs also increased due to increase in warranty provisioning. However, decline in manufacturing cost as a percentage of sales from 76.6% in 4QFY10 to 74.6% in 4QFY11 cushioned margins.
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  • Overall, the company's order inflows increased by 27% YoY during the quarter. Despite deferment in some infrastructure and power projects the order inflow growth is an encouraging sign. At the end of March 2011, L&T had an order backlog of Rs 1.30 trillion, up 15% YoY. Order inflow from the E&C business registered a growth of 14% YoY. Major orders came from metals, minerals, buildings and factories.

  • L&T's profits grew by 17.3% YoY during 4QFY11. Profit growth was propelled by exceptional gains on sale of investment in associate company and rise in other income partially offset by increase in depreciation expenses. Depreciation expenses increased due to increase in asset base and other income increased due to higher treasury income. Nonetheless, adjusting for extraordinary and non-recurring items profits grew by 9.1% YoY.

What to expect?
At the current price of Rs 1,595, the stock is trading at a multiple of 17.9 times our estimated FY13 consolidated earnings. Going forward, rising inflation and hardening interest rates would keep margins under check. However, the overall environment seems to be conducive as witnessed by the execution pick up in the E&C segment. Nonetheless, valuations are above our comfort zone. As a result we maintain our cautious view on the stock.

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