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L&T: Capital restructuring pays

May 29, 2003

L&T, the EPC and cement major, has announced better than expected results for the March quarter and for the full year FY03. The company has reported a 12% topline growth for FY03 while its bottomline growth has been higher at 25%. The March quarter especially has been very good for the company where the bottomline has risen by nearly 42% albeit on a lower topline growth of 11%. Topline growth at 12% (FY03) seems a bit subdued in comparison to its performance in 9mFY03. In this regard the March quarter has been a dampener. Growth at the net level in FY03 was mainly on account of a 44% fall in interest expenses. Operating profits have however fallen in FY03.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net Sales 28,290 31,524 11.4% 83,589 93,601 12.0%
Other Income 698 1,349 93.1% 2,197 2,774 26.3%
Expenditure 25,472 28,728 12.8% 75,257 86,458 14.9%
Operating Profit (EBDIT) 2,819 2,796 -0.8% 8,331 7,144 -14.3%
Operating Profit Margin (%)10.0%8.9%10.0%7.6%
Interest 507 241 -52.5% 3,159 1,770 -44.0%
Depreciation 903 786 -12.9% 3,362 3,046 -9.4%
Profit before Tax2,1073,11748.0%4,0075,10227.3%
Extraordinary items - - - -
Tax 239 461 92.9% 539 771 43.0%
Profit after Tax/(Loss) 1,868 2,656 42.2% 3,468 4,331 24.9%
Net profit margin (%)6.6%8.4%4.1%4.6%
No. of Shares 249.0 249.0 249.0 249.0
Diluted Earnings per share*30.042.713.917.4
P/E Ratio 12.6
(* annualised)

Topline growth for the company seems to have been aided mainly by strong growth in the EPC division of the company. FY03 has been witness to higher demand for capital goods from the domestic as well as the export markets. L&T being the largest player in this segment has benefited immensly. L&T has been able to increase its exports significantly in FY03 and this has led to the healthy improvement in topline growth. L&T's EPC order book has risen to Rs 130 bn a growth of 20% in FY03. Also the EPC division has been benefitted by the higher level of infrastructure activity in the country. L&T's construction division has won a large proportion of the highway contracts that have been awarded to the private sector. While the EPC division has been growing strongly the cement division has suffered from poor realisations in FY03. This seems to have reduced the contribution of the cement division to the topline growth in FY03. Though we have seen poor realisations in FY03, we believe the pressure on cement price is easing across the country as the excess capacity is being absorbed by the domestic markets.

An indication of improving prices is the fact that the company's operating margins have shown an improvement in the March quarter. Pressure on margins was mainly on account of the cement division and an improvement in the same is most likely due to improvement in cement prices across the country. L&T is a strong player in the southern markets and it seems to have benefited from the strong growth in demand seen in the southern markets. While we have no official figures we believe that dispatches seem to have grown robustly but with the exception of the March quarter.

L&T's margins have however declined considerably by 240 basis points to 7.6% in FY03. This may be attributed to the fact that cement realisations are still weak in comparison to last year. Higher sales from the exports segment may have come at a price. The margins in this segment have been historically lower as there are a large number of international players in the fray for the same projects.

However the main highlight of the company's performance has been the significant reduction in interest cost of the company. The interest costs have reduced by a significant 44% in FY03. The low interest rate scenario has helped the company reduce its interest burden significantly. We believe that the company has been able to repay debt in FY03 leading to the significant fall in interest expenses.

At Rs 219, the stock is trading at a P/E multiple of 13x its annualised FY03 earnings. Delay in the cement division demerger issue is the main overhang on the stock price of L&T. However as far as the business fundamentals are concerned, the EPC business division's operating margins are likely to face further pressure. However strength in volumes have compensated for this to a large extent. Also the cement division may see an improvement in fortunes with prices showing some signs of strength in select regions. For the long term, the company has done well to improve its business fundamentals by concentrating on exports for both its cement and EPC division. Domestic demand has also been strong and is expected to be robust on both the engineering and cement front.

The company has also resorted to aggressive capital restructuring which has reduced its capital cost significantly. Taking all the above factors into consideration, the prospects of the company look promising. However, in the short term valuations may be dictated more by the cement division demerger issue than business fundamentals. The company is holding an analyst meet tomorrow. We shall provide a further detailed analysis of the results post the meet.

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