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L&T FY06 results: Our view - Views on News from Equitymaster
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L&T FY06 results: Our view
May 25, 2006

Performance summary
India’s largest engineering company, L&T, has announced decent results for the fourth quarter and fiscal ended March 2006. On a consolidated basis, revenues have grown by 14% YoY. Operating margins have expanded by 150 basis points during the fiscal. Combined with this, a higher extraordinary income and share of associates’ profit has helped the company grow its net profits by 26% YoY. The board has recommended a dividend of Rs 22 per share (dividend yield of 1%).

Financial performance: Consolidated snapshot
(Rs m) FY05 FY06 Change
Sales 144,969 165,604 14.2%
Expenditure 133,176 149,765 12.5%
Operating profit (EBDITA) 11,793 15,838 34.3%
Operating profit margin (%) 8.1% 9.6%  
Other income 5,407 4,582 -15.3%
Interest 1,025 1,303 27.1%
Depreciation 2,122 2,435 14.8%
Profit before tax 14,052 16,683 18.7%
Minority interest 639 450  
Share of profit from integrated JVs (38) 715  
Extraordinary income/(expense) - 698  
Tax 2,881 4,473 55.3%
Profit after tax/(loss) 10,495 13,172 25.5%
Net profit margin (%) 7.2% 8.0%  
No. of shares 129.9 137.4  
Diluted earnings per share (Rs)   95.9  
P/E ratio (x)   23.7  

What is the company’s business?
Larsen & Toubro (L&T) is India’s largest engineering company with expertise in wide areas like infrastructure, oil and gas, power and process. The company has broadly segregated its business into two key segments – Engineering and Construction (E&C) and Electrical & Electronics (E&E). While the former contributes to around 77% of L&T’s revenue, the latter is around 9%. Out of the remaining 14%, a large share comes from the company’s IT services business. During the period between FY03 and FY06, the company has grown its consolidated revenues and profits at compounded rates of 17% and 34% respectively.

What has driven performance in FY06?
All-round growth: Strong growth in order booking has helped L&T grow its E&C division revenues by 12% YoY during FY06. This division contributed to 77% of total revenues during the fiscal. The order booking grew by 51% YoY to Rs 196 bn (including Rs 38 bn of international orders). At the end of FY06, the segment’s order backlog stood at Rs 242 bn, which is 1.8 time the segment’s FY06 sales. More importantly, a large part of the bookings and backlog are made up of orders related to the hydrocarbon sector, where, on the basis of the superior technological expertise requirements, margins are relatively superior as compared to orders relating to the infrastructure segment.

During the year, the company won a couple of large projects from ONGC. While the first project worth Rs 10 bn was for constructing four well platforms and interconnecting pipelines for ONGC’s Bombay High North and Bassein fields, the second project worth Rs 13 bn was for a major offshore project. The company also won Rs 4.9 bn order from the Hyderabad International Airport for construction of passenger terminal buildings, utilities and electrification.

Segment-wise performance…
  FY05 FY06 Change
Engineering & Construction
Revenue 117,667 131,634 11.9%
% share 79.0% 76.6%  
PBIT margin 6.5% 7.8%  
Electrical & Electronics
Revenue 12,200 15,823 29.7%
% share 8.2% 9.2%  
PBIT margin 11.8% 14.6%  
Others
Revenue 19,003 24,395 28.4%
% share 12.8% 14.2%  
PBIT margin 17.0% 21.1%  
Total
Revenue* 148,869 171,851 15.4%
PBIT margin 8.3% 10.3%  
* Excluding inter-segment adjustments

As for the electrical and electronics (E&E) business, revenues witnessed a 30% YoY growth during FY06. As we had mentioned earlier, strong performance of this segment has mainly been a result of increased investments in the power sector.

Lower input costs aid margin expansion: During FY06, L&T reported a 1.5% expansion in operating margins (to 9.6%). This has been mainly brought about by a decline in raw material expenses, from 29.9% of sales in FY05 to 22.5% in FY06. Softening commodity prices seem to have had this positive effect on L&T’s raw material costs during the fiscal. Based on segments, while PBIT margins of the E&C division have improved to 7.8% (6.5% in FY05), those for the E&E division have expanded to 14.6% (11.8% in FY05).

Margin expansion, higher extraordinary income boosts profits: L&T’s bottomline has reported a 26% YoY growth during FY06. Apart from the expansion in operating margins, higher share of profit from associates and an extraordinary income on sale of milk equipment and glass container businesses has aided this superior growth in net profits during the fiscal.

What to expect?
At the current price of Rs 2,275, the stock is trading at a price to earnings multiple of 23.7 times its FY06 consolidated earnings. The board has recommended a dividend of Rs 22 per share (dividend yield of 1%). The board will also meet on June 7 to consider the issue of bonus shares.

While the company has underperformed our FY06 topline estimates by 10%, the performance at the PBT level is superior by 15%, mainly due to better than estimated improvement in operating margins. Considering the strong accretion to the order book, we expect L&T’s revenues to grow at a robust rate going forward. Also, margins are likely to witness further improvement on the back of lower input prices.

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