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L&T: Unfettered by the slowdown

May 28, 2009

Performance summary
  • Standalone and consolidated sales grow 35% YoY and 38% YoY respectively during FY09. Growth led by strong performance from the engineering and construction (E&C) segment. Consolidated topline 3% higher than our estimates.
  • Higher construction material costs and subcontracting charges lead to a 0.2% YoY contraction in consolidated operating margins during the fiscal. Margins on a standalone basis contract by 0.7% YoY.
  • Consolidated net profits (excluding extraordinary items) grow 31% YoY during FY09. Net profits are 15% higher than our estimates. Sharp increase in interest expense takes some sheen off the bottomline.
  • Board recommends a final dividend of Rs 10.5 per share (dividend yield of 0.8%).

  Standalone Consolidated
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change FY08 FY09 Change
Sales 84,669 104,690 23.6% 248,547 336,466 35.4% 291,985 401,870 37.6%
Expenditure 73,700 90,181 22.4% 220,401 300,695 36.4% 257,505 355,212 37.9%
Operating profit (EBDITA) 10,968 14,509 32.3% 28,146 35,770 27.1% 34,480 46,658 35.3%
Operating profit margin (%) 13.0% 13.9%   11.3% 10.6%   11.8% 11.6%  
Other income 2,703 3,668 35.7% 5,879 10,196 73.4% 6,492 8,682 33.7%
Interest 499 1,455 191.7% 1,227 3,502 185.5% 2,031 4,620 127.4%
Depreciation 682 889 30.5% 2,116 3,060 44.6% 5,097 7,283 42.9%
Profit before tax 12,492 15,833 26.7% 30,682 39,404 28.4% 33,843 43,437 28.3%
Extraordinary income/(expense) 872 (1,439)   872 7,725 785.5% 343 7,891  
Tax 3,696 4,409 19.3% 9,821 12,312 25.4% 11,608 14,257 22.8%
Share of profit/(loss) from asociates NA NA   NA NA   1,358 509 -62.5%
Minority interest NA NA   NA NA   (683) 314 -146.0%
Profit after tax/(loss) 9,668 9,985 3.3% 21,734 34,817 60.2% 23,254 37,895 63.0%
Net profit margin (%) 11.4% 9.5%   8.7% 10.3%   8.0% 9.4%  
No. of shares             292.3 585.7  
Diluted earnings per share (Rs)             39.7 64.7  
P/E ratio (x)               21.7  

What has driven performance in FY09?
  • L&T grew its consolidated sales by 38% YoY during FY09. This was aided by a robust 50% YoY growth in E&C division sales (75% of FY09 total sales). As per the company, even though new investment in the infrastructure, oil & gas and other core sectors of the economy was considerably halted due to the slowdown, the construction industry managed to grow at a relatively higher rate riding on its comfortable order book. The power sector and the railways too saw a good amount of investment during FY09. Riding on the business from these areas, L&Tís E&C segment saw healthy order inflows of Rs 454 bn during FY09 (an increase of 28% YoY). International orders comprised 14.5% of the segmentís order inflow. The segment ended FY09 with a healthy order book of Rs 687 bn, which is 2.2 times its FY09 sales.

    Segment-wise performance (Consolidated)
    (Rs m) FY08 FY09 Change
    Engineering & construction      
    Revenue 210,822 315,131 49.5%
    % share 68.7% 74.6%  
    EBIT margin 9.8% 10.9%  
    Electrical & electronics      
    Revenue 26,675 33,807 26.7%
    % share 8.7% 8.0%  
    EBIT margin 14.9% 10.4%  
    Machinery & industrial products      
    Revenue 26,866 27,052 0.7%
    % share 8.8% 6.4%  
    EBIT margin 15.7% 16.7%  
    Financial services      
    Revenue 7,582 11,260 48.5%
    % share 2.5% 2.7%  
    EBIT margin 32.6% 20.3%  
    Developmental projects      
    Revenue 3,048 5,454 78.9%
    % share 1.0% 1.3%  
    EBIT margin 52.1% 19.9%  
    Revenue 31,818 29,866 -6.1%
    % share 10.4% 7.1%  
    EBIT margin 12.2% 11.9%  
    Revenue 306,812 422,569 37.7%
    EBIT margin 12.0% 11.7%  
    * Excluding inter-segment adjustments

    As for the companyís electrical and electronics (E&E) business, sales grew by 27% YoY during the fiscal. The Machinery & Industrial Products (MIP) businessí sales remained almost flat.

  • L&Tís consolidated operating margins contracted by a marginal 0.2% during FY09. This was largely on account of the rise in expenses incurred on procuring construction materials as also higher subcontracting charges (as a percentage of sales). While cost of construction materials increased from 20.4% of the companyís sales in FY08 to 21% in FY09, sub contracting charges increased from 17% to 19.1%. Based on segments, while the E&C and MIP segments recorded expansion in EBIT margins, there was a contraction in profitability of the E&E business. The E&C segmentís margin improvement during the year was helped by contractual pass through of cost escalations and higher proportion of bigger margin projects under execution.

  • On the back of contraction in operating margins and a 127% YoY surge in interest expenses, L&Tís bottomline growth underperformed the growth in sales during the year. Net profits grew by 31% YoY excluding the one-off items (disposal of stake in subsidiary company). The extraordinary items for the year include a gain on the divestment of the RMC business as also a provision of Rs 1.9 bn made in 4QFY09 towards the investment in Satyam.

What to expect?
At the current price of Rs 1,403, the stock is trading at a multiple of 25 times our estimated FY11 consolidated earnings. L&T has been aggressively pursuing opportunities in the nuclear power segment and has signed MoUs with Westinghouse Electric Company (US), Atomic Energy (Canada), Atomstroyexport (Russia), GE Hitachi Nuclear Energy (US) during the year for forays into nuclear power equipment. The company sees power, railways, water, hydrocarbons, defense, nuclear and forgings as some of the growth areas going forward, and has built up capacities for the same. As indicated by the management, the slowdown seen in the industrial sectors coupled with lower investment in the infrastructure and core sectors may have some initial impact on the companyís ability to obtain fresh orders. However, it expects Indiaís basic requirement to focus on large investments into the energy and infrastructure sectors to receive a fillip as a part of the pro-reform policy of the new government. The company saw order inflows of Rs 516 bn during FY09 and ended the year with an order backlog Rs 703 bn which is about 1.8 times its sales in FY09. Though the companyís diversified business forays and reforms from the new government are expected to keep its revenues going, we are cautious with respect to the stockís valuations.

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