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L&T: Cost control reaps benefits
Jun 4, 2014 | Updated on Jun 5, 2014

Larsen & Toubro (L&T) has announced the fourth quarter results of financial year 2013-2014 (4QFY14). The company has reported 11.1% YoY and 40.7% YoY growth in sales and recurring profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grew by 11.1% YoY during 4QFY14. The moderate growth in sales was a result of delay in various clearances and deferment of contract awards.
  • Operating profits increased by 36.2% YoY in 4QFY14. Operating margins expanded substantially (up 2.7% YoY) to come in at 14.4%
  • Other income increased by 27% YoY. Recurring profits increased by 40.7 % YoY during the quarter.
  • L&T's order inflow for the quarter came in at Rs 267 bn during the quarter; which was same as the corresponding quarter of previous year.
  • Total order inflow during FY14 was Rs 941 bn (up 15% YoY).
  • The total order book at the end of the quarter stood at Rs 1630 bn (up 13% YoY).
  • The company has recommended a dividend of Rs. 14.25 per share.

(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 180,756 200,791 11.1% 516,110 565,989 9.7%
Expenditure 159,464 171,781 7.7% 461,378 499,319 8.2%
Operating profit (EBDITA) 21,292 29,010 36.2% 54,731 66,670 21.8%
Operating profit margin (%) 11.8% 14.4%   10.6% 10.3%  
Other income 3,895 4,953 27.2% 18,873 18,809 -0.3%
Interest 2,634 3,049 15.8% 9,548 10,761 12.7%
Depreciation 1,969 2,138 8.6% 7,277 7,924 8.9%
Profit before tax 20,585 28,775 39.8% 56,779 66,794 17.6%
Tax 4,673 6,381 36.5% 15,413 17,748 15.1%
Exceptional items 0 4,841 NA 1,762 5,885 233.9%
Extraordinary items 187 0 NA 716 0 NA
Profit after tax 16,099 27,235 69.2% 43,845 54,931 25.3%
Profit/loss from discontinued operations 1,780 0 NA 5,262 0 NA
Reported profit after tax/(loss) 17,879 27,235 52.3% 49,107 54,931 11.9%
Recurring profit adjusted for extraordinary & exceptional items # 15,912 22,394 40.7% 41,366 49,046 18.6%
Adjusted net profit margin (%) 8.8% 11.2%   8.0% 8.7%  
No. of shares         926.1  
Basic recurring earnings per share (Rs)         53.0  
P/E ratio (x)*         31.5  
* Excluding inter-segment adjustments & excise duty
#Equitymaster Adjustments

What has driven performance in 4QFY14 and FY14?
  • L&T's sales growth was aided by strong growth in 'Infrastructure' segment (up 17.7% YoY) and 'Heavy Engineering' (up 41.5% YoY) segment. However, further growth in sales was restricted due to poor performance of 'Power' (down 29.2% YoY), and 'Metallurgical and Material Handling' (down 11% YoY) segments. 'Machinery & Industrial Products' too reported a negative growth of 38.7% YoY.

  • Revenue growth from the infrastructure segment was boosted by strong opening order book and its timely execution. Margins from the segment improved 1% on account of improved efficiency and stable commodity cost.

  • Heavy Engineering too performed very well as the revenues were driven by process plant and nuclear power equipment business. Margins too improved by 2.5% to 20.2%.

  • Power revenue growth was affected on account of declining order book of the segment due to subdued investment climate in the power sector. Margins, however, have improved substantially from 6.4% to 14.1% in 4QFY14. This was largely on account of jobs which were in advanced stages of execution. In other words, orders which had met the margin threshold of the company.

  • Machinery and Industrial Products is another segment which have not performed well since few quarters. The dip in revenues was due to industrial slowdown. Margins too have declined due to sluggish business environment and increase in competition.

  • Operating profit grew by 36.2% YoY. The stupendous growth in operating profit was a result of efficient cost control and stable commodity prices. Also, SG&A expenses declined by 66% YoY in the quarter led by provision write back on warranty closures and favourable exchange rate.

  • In the last quarter, 3QFY14, the Hydrocarbon business was demerged and transferred to L&T's wholly owned subsidiary. As such, 4QFY13 results have been adjusted to exclude the contribution of erstwhile hydrocarbon business. The profits for the same have been disclosed separately under discontinued operations.

  • Adjusting for profits from discontinued operations, exceptional and extra ordinary items; recurring profit after tax has increased by around 41% YoY in 4QFY14.

  • For FY14, the sales have moderately increased by 9.7% primarily due to execution challenges and declining and slow moving order book in some of the segments such as Power. Operating profit increased by 21.8% YoY. Operating margin has come in at 11.8% in FY14 vs 10.6% last year. Recurring net profit has increased by 18.6% YoY.

    Segment-wise performance (Standalone)
      4QFY13 4QFY14 Change FY13 FY14 Change
    Infrastrcuture
    Revenue 115,058 135,395 17.7% 288,190 351,153 21.8%
    % share 54% 60%   49% 57%  
    EBIT margin 10.6% 11.6%   9.9% 11.0%  
    Power 
    Revenue 20,790 14723.2 -29.2% 80738.5 51,401 -36.3%
    % share 13% 8%   17% 10%  
    EBIT margin 6.4% 14.1%   7.3% 10.1%  
    Metallurgical & Material Handling 
    Revenue 20,087 17880.3 -11.0% 64304.4 55,461 -13.8%
    % share 12% 11%   13% 10%  
    EBIT margin 18.8% 17.0%   15.1% 14.8%  
    Heavy Engineering 
    Revenue 9,589 13,573 41.5% 30,026 43,218 43.9%
    % share 6% 7%   6% 8%  
    EBIT margin 17.7% 20.2%   16.9% 15.9%  
    Electrical Automation 
    Revenue 11,168 11,602 3.9% 36439.5 39,073 7.2%
    % share 6.60% 6.80%   7.20% 7.30%  
    EBIT margin 13.1% 14.2%   9.8% 11.1%  
    Machinery & Industrial Products 
    Revenue 7,445 4563 -38.7% 23951.9 19428.7 -18.9%
    % share 4.40% 3.00%   4.70% 4.00%  
    EBIT margin 14.1% 9.7%   16.8% 10.8%  
    Others 
    Revenue 3,828 9258.3 141.9% 15,259 23469.6 53.8%
    % share 3.10% 3.90%   3.30% 3.80%  
    EBIT margin -64.1% 22.6%   14.6% 9.2%  
    Total*
    Revenue 187,965 206,994 10.1% 538,909 583,204 8.2%
    * Excluding inter-segment adjustments & excise duty
What to expect?
L&T has delivered commendable results amongst a challenging environment. Its cost control practices have yielded desired results despite intense competition and execution challenges in its premium segments. The company has also streamlined its order book by removing Rs 150 bn slow moving orders from its order book.

Going forward, while maintaining a cautious outlook on business scenario; the company is hopeful that the new government shall remove bottle necks presently affecting the core sectors such as infrastructure, power, metal and real estate. Also, on international front, Middle East holds lots of opportunities for the company. The international segment now comprises 21% and 16% of the company's order book and sales respectively. This shall provide cushion to the company in case of delay in pick up in domestic business environment.

We had closed the position on L&T on March 28th, 2014 mentioning the rationale in our StockSelect report.

We shall soon update the investors with a revised view, if any, and target price on the stock. It is to be noted that with a stable and reform friendly government at the helm; engineering behemoth like L&T are likely to be the key beneficiaries of pick up in the investment climate and overall economic scenario. However, at the current stock price of Rs 1,667, the stock is trading at a multiple of 31.5 its trailing 12 month earnings, which looks expensive and factors in possible upsides over the next 2 years. Hence, we recommend investors to avoid buying the stock at current levels.

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