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L&T: Analyst meet notes

Jun 18, 2002

L&T is the largest Engineering Procurement and Construction (EPC) company in the country. L&T is also the second largest cement producer in India and it is precisely this size that has helped the company tide over the difficult economic conditions prevailing in the country. The company reported a 10% increase in its net profits while its sales rose by a lackluster 7% during FY02. Detailed L&T results Salient points:

  • The MD, Mr A M Naik, remarked that the economic condition of the country had not been conducive for investments in the previous year. There were no major investments in the petrochemical, power, oil and gas, and steel sectors. In addition to the lack of investments, the company faced competition from the public sector engineering company Engineers India Limited (EIL). The MD also stated that due to purchase preference most of the government contracts were being awarded to EIL.

  • Mr Naik stressed that the company planned to focus its resources towards exports. The company has increased its share of exports from 2% of revenues last year to 13% in FY02. The company plans to increase the contribution from exports to 30% of total revenues by FY05.

  • The company has initiated many restructuring exercises including employee rationalisation by offering VRS, debt restructuring and increased use of information technology to facilitate business processes. The company has also initiated cost reduction exercises across all its divisions.

  • To improve the processes within the company, L&T has initiated value engineering, global sourcing and six sigma exercises. The MD also stated that the company was booking projects with longer gestation period, which has resulted in an increase in average execution cycle. The current order backlog of the company stood at Rs 110 bn at the beginning of FY03.

  • The companyís Electrical and Electronics division reported a marginal 2% growth in its revenues. This dismal growth was attributed to degrowth of the switchgears segment in which the company has over 40% market share. This division has come under increasing pressure due to increased competition and consequently lower margins.

  • The cement division has reported an increase in its operating margins, from 16.9% in FY01 to 18.5% in FY02. The cement exports have gone up to 1 m tonnes compared to 0.7 m tonnes last year. On the domestic front, sales volume has increased by 6.5% to 9.5 m tonnes.

  • The company has retired Rs 3.4 bn debt. In addition, debt restructuring has helped the company reduce its interest expenses by nearly 13%. The company expects to pay off Rs 4.5 bn debt in the current year. Consequently, L&Tís interest expense is expected to get pruned by Rs 400 m during FY03.

An upturn in the economy is likely to benefit the EPC division of the company while healthy cement demand will help L&T maintain a healthy topline. All said, investors are keeping away from the company as there is lack of clarity on the cement division demerger issue, and hence business prospects are the last thing on their minds. The companyís valuations are set to improve once the company announces a time frame for the proposed demerger of its cement business. The demerger is bound to unlock a considerable amount of value for investors.


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