L&T: Trips in the fourth quarter - Views on News from Equitymaster

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L&T: Trips in the fourth quarter

Jun 14, 2002

L&T has announced that for the year FY02 its profits have grown by 10% YoY. The topline of the company grew by a lacklusture 7% in the same period. For the fourth quarter however the topline grew by an encouraging 14% YoY. The net profits for the fourth quarter declined considerably by 25% due to a 15% increase in its operating expenses.

(Rs m) 4QFY01 4QFY02 Change FY01 FY02 Change
Net Sales 24,797 28,290 14.1% 78,254 83,589 6.8%
Other Income 918 698 -23.9% 2,097 2,197 4.8%
Expenditure 21,631 25,472 17.8% 70,220 75,257 7.2%
Operating Profit (EBDIT) 3,166 2,819 -11.0% 8,034 8,331 3.7%
Operating Profit Margin (%) 12.8% 10.0%   10.3% 10.0%  
Interest 543 507 -6.5% 3,613 3,159 -12.6%
Depreciation 850 903 6.3% 3,131 3,362 7.4%
Profit before Tax 2,691 2,107 -21.7% 3,387 4,007 18.3%
Extraordinary items            
Tax (187) (239) 27.8% (236) (539) 128.0%
Profit after Tax/(Loss) 2,504 1,868 -25.4% 3,151 3,468 10.1%
Net profit margin (%) 10.1% 6.6%   4.0% 4.1%  
No. of Shares 249.0 249.0   249.0 249.0  
Diluted Earnings per share* 40.2 30.0   12.7 13.9  
P/E Ratio   10.2     21.9  
(* annualised)            

Performance in fourth quarter has been dismal. Depressed cement prices have been cited as the main reason for the drop in net profits. Also, the higher operating expenses has hit margins of the company. The operating profits for the fourth quarter fell by 11% YoY. The fourth quarter results are surprising, especially since L&T had perfromed well in the first three quarters of FY02. L&T reported net profit growth of 244%, 223% and 63% in the first three quarters respectively.

L&T's engineering and construction division reported a modest 7% growth in FY02. The company's order book has risen by 5% in FY02. A sluggish economy and lack of investments in the core sectors have been cited as reasons for the dismal growth in revenues from this division. The company, however, reported a 75% rise in its export revenues from this division. The company expects good business from the core infrastructure sectors like power and roads in the current year. Exports will remain a thrust area for the company going forward.

L&T's cement division has generated good business for the company in FY02. while the volumes from this division grew by 7% the revenues grew by 8%. Good domestic demand and increased cement exports have led to the good performance of the division. Cement prices have however come under increasing pressure due to oversupply in the market. In spite of the pressure on prices, sales realisation on cement for L&T has gone up by 4% to Rs 1,303/ tonne in FY02. Cement exports are likely to be a major focus area for the company going forward, especially after it obtained a European quality certification. This certification will ensure better access to the European markets.

The electrical and electronics division of the company has reported stagnant growth in FY02. The margins have come under pressure due to poor domestic demand and increased competition from multinationals. The company has concentrated its efforts towards exports and has acheived higher revenues from exports from this division. L&T has prepaid Rs 3.4 bn of its total long term debt of Rs 27 bn in FY02. The company also refinanced its loans to take advantage of low interest rates to further reduce its interest costs. A jump in tax expenditure is due to provisioning of Rs 293 m for deferred taxes in FY02.

The stock is trading at Rs 180 on a P/E multiple of 13x FY02 earnings. L&T's exposure to cyclical businesss makes it susceptible to domestic economic conditions. A lacklusture growth of the engineering business has affected the topline growth of the company. Early indications of an upturn in the domestic economy is encouraging news for the company. L&T will also benefit from the healthy demand from cement markets. With cement demand set to grow at nearly 8-9% for the next 2 years, L&T with its large capacity and extensive reach is in a good position to capitalise on the opportunity. The stock price is currently depressed due to the management's non commital attitude towards the demerger of the cement business. The valuations may improve once the management sets a deadline for the proposed demerger.


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