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L&T: Growth momentum maintained - Views on News from Equitymaster
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L&T: Growth momentum maintained
May 30, 2008

Performance summary
  • Standalone and consolidated sales grow 42% YoY and 44% YoY respectively during FY08. Growth led by strong performance from the engineering and construction (E&C) segment.
  • Higher construction material and raw material costs have led to a 0.2% YoY contraction in consolidated operating margins during the fiscal. Margins on a standalone basis expand by 1.4% YoY.

  • Consolidated net profits (excluding extraordinary items) grow 31% YoY during FY08. Sharp increase in tax expenses takes some sheen off the bottomline.

  • Board recommends a final dividend of Rs 15 per share. Including the special interim dividend of Rs 2 per share, total dividend for FY08 stands at Rs 17 per share (dividend yield of 0.6%).

  • Bonus issue in the ratio of 1:1 (one free share for every one share held in the company as on the record date) has also been recommended.

  • E&C order backlog stood at Rs 527 bn at the end of March 2008 (2.5 times consolidated sales of the segment in FY08).

Financial performance snapshot
  Standalone Consolidated
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change FY07 FY08 Change
Sales 62,448 84,669 35.6% 175,671 248,547 41.5% 203,360 291,985 43.6%
Expenditure 54,355 73,487 35.2% 158,214 220,401 39.3% 178,983 257,514 43.9%
Operating profit (EBDITA) 8,093 11,181 38.2% 17,457 28,146 61.2% 24,378 34,471 41.4%
Operating profit margin (%) 13.0% 13.2%   9.9% 11.3%   12.0% 11.8%  
Other income 2,214 2,491 12.5% 4,993 5,879 17.7% 5,756 6,501 12.9%
Interest 231 499 115.5% 930 1,227 31.9% 1,584 2,031 28.2%
Depreciation 698 682 -2.3% 1,700 2,116 24.5% 3,449 5,097 47.8%
Profit before tax 9,378 12,492 33.2% 19,820 30,682 54.8% 25,101 33,843 34.8%
Extraordinary income/(expense) - 872   229 872 281.3% 4,950 343  
Tax 2,371 3,696 55.9% 6,019 9,821 63.2% 7,438 11,608 56.1%
Share of profit/(loss) from asociates NA NA   NA NA   951 1,358 42.9%
Minority interest NA NA   NA NA   1,162 683 -41.2%
Profit after tax/(loss) 7,008 9,668 38.0% 14,030 21,734 54.9% 22,401 23,254 3.8%
Net profit margin (%) 11.2% 11.4%   8.0% 8.7%   11.0% 8.0%  
No. of shares             283.3 292.3  
Diluted earnings per share (Rs)             76.6 79.5  
P/E ratio (x)               36.3  

What has driven performance in FY08?
  • L&T grew its consolidated sales by 44% YoY during FY08. This was aided by a 43% YoY growth in E&C division sales (69% of FY08 total sales). Growth in this segment was aided by the ongoing execution of some large-scale projects. This division recorded and order inflow of Rs 354 bn during FY08, which was a growth of 40% YoY. L&T is currently working on some large size projects in this segment, namely - Delhi airport, captive power plant for naphtha cracker project for IOC, construction of port facilities, embarkment, bridges, jetty and township including railway electrification and water system works at Dhamra Port, Orissa for The Dhamra Port Company Limited and engineering, procurement, installation and commissioning for 2 new offshore platform, a flare platform and interconnecting bridge for block 5 development in Qatar for Maersk Oil Qatar AS.

     

    At the end of March 2008, the order backlog for the E&C segment stood at Rs 527 bn, almost 2.5 times the segment’s sales in FY08. During the fiscal, some of the large contracts that L&T won in this segment include:

  • Construction of Mumbai International Airport including design and engineering of terminal building, airside works and runways – Rs 55 bn

  • Construction and civil work for the Northern Area Development project in Rajasthan for Cairn Energy India – Rs 13.5 bn

  • Mumbai High South Redevelopment Phase – II project at Mumbai High for ONGC – Rs 12.6 bn

  • Manufacture and supply of reactors and separators for Clean Fuel Project of Kuwait National Petroleum Company – Rs 17 bn

  • Building of semi submersible Heavy Lift Container Carrier Vessels for Roll Dock BV, Netherlands – Rs 5.8 bn

    Segment-wise performance (Consolidated)
    (Rs m) FY07 FY08 Change
    Engineering & construction      
    Revenue 146,695 210,033 43.2%
    % share 68.0% 68.7%  
    EBIT margin 10.3% 9.8%  
    Electrical & electronics      
    Revenue 20,564 26,556 29.1%
    % share 9.5% 8.7%  
    EBIT margin 14.7% 15.0%  
    Machinery & industrial products      
    Revenue 20,210 26,804 32.6%
    % share 9.4% 8.8%  
    EBIT margin 16.4% 15.8%  
    Financial services      
    Revenue 3,134 7,551 141.0%
    % share 1.5% 2.5%  
    EBIT margin 28.5% 32.7%  
    Developmental projects      
    Revenue 1,452 3,038 109.2%
    % share 0.7% 1.0%  
    EBIT margin 204.8% 52.3%  
    Others      
    Revenue 23,717 31,766 33.9%
    % share 11.0% 10.4%  
    EBIT margin 12.3% 12.2%  

    As for the company’s electrical and electronics (E&E) business, sales grew by 29% YoY during the fiscal. The Machinery & Industrial Products (MIP) business recorded sales growth of 33% YoY during the year as robust demand from industrial, infrastructure and hydrocarbons sectors led growth for the company’s construction and mining equipments. This quarter onwards, L&T has also started reporting performance of its financial services (L&T Finance) and developmental projects (L&T-IDPL) segments. These grew sales by 141% YoY and 109% YoY respectively during the fiscal.

  • L&T’s consolidated operating margins contracted by a marginal 0.2% during FY08. This was largely on account of the rise in expenses incurred on procuring construction and raw materials. While cost of construction materials increased 22.4% of the company’s sales in FY07 to 24% in FY08, raw material costs increased from 23.6% to 28.7%. Based on segments, while the E&C and MIP segments recorded slight contraction in EBIT margins, there was a nominal expansion in profitability of the E&E business.

  • On the back of contraction in operating margins and a 56% YoY rise in tax expenses, L&T’s 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).

  • L&T’s subsidiaries continue to do well. While the IT subsidiary, L&T Infotech recorded 23% YoY and 40% YoY growth in sales and PAT respectively during FY08, L&T Finance recorded growth of 124% YoY and 84% YoY respectively.

What to expect?
At the current price of Rs 2,988, the stock is trading at a multiple of 17.1 times our estimated FY10 consolidated earnings. Considering the initiatives that the company is taking in terms of restructuring its businesses and diversifying into fast growing areas like shipbuilding, we maintain our positive view on the stock from a 2 to 3 years perspective. We continue to believe that L&T’s leadership position in the construction, projects and manufacturing-led businesses holds good potential for growth in the future. The management has indicated of a 30% to 35% growth in topline over the next few years, which we believe is achievable considering the company’s existing backlog and strong inflow of orders, both in the domestic and international markets. As far as the impact of raw material prices on profitability is concerned, the management has indicated that since around 60% of L&T’s contracts have cost escalation clause, they are in a position to mitigate any risk on this account. Even then, it expects margins to remain at current year levels going forward as well. We shall soon update our research report on the company, factoring in a greater amount of caution as far as material costs and subsequently operating margins are concerned. However, our topline estimates are not likely to witness any major change.

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