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L&T: Pace of execution a big dampener - Views on News from Equitymaster
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L&T: Pace of execution a big dampener
Jul 2, 2015

Larsen & Toubro (L&T) has announced the fourth quarter results of financial year 2014-2015 (4QFY15). The company has reported 4% YoY growth in sales while net profits have fallen 27% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales for the company fell by 4% YoY during 4QFY15.
  • Operating expenses for the company increased at a higher pace of 5% YoY. This led to operating margins falling by 0.9% YoY compared to the same quarter of the previous year. Overall, operating profit fell by 3.5% YoY in 4QFY15.
  • Net profit fell by 27% YoY during the quarter, mainly due to challenges faced during execution of international projects within the hydrocarbon space.

Financial performance snapshot (Consolidated)
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Sales 270,241 280,226 3.7% 851,284 920,046 8.1%
Expenditure 232,854 244,137 4.8% 743,986 806,690 8.4%
Operating profit (EBDITA) 37,387 36,090 -3.5% 107,298 113,356 5.6%
Operating profit margin (%) 13.8% 12.9%   12.6% 12.3%  
Other income 2,693 2,808 4.3% 9,818 10,072 2.6%
Interest 7,875 4,739 -39.8% 31,380 28,507 -9.2%
Depreciation (2,860) 5,876   14,458 26,225 81.4%
Exceptional items  2,944 984 - 3,615 3,477 -
Profit before tax 38,009 29,267 -23.0% 74,892 72,172 -3.6%
Tax 8,881 7,961 -10.4% 26,284 22,836 -13.1%
Extraordinary items, net of tax 3 -   (63) -  
Profit after tax/(loss) 29,131 21,306 -26.9% 48,546 49,337 1.6%
Net profit margin (%) 10.8% 7.6%   5.7% 5.4%  
Share in profit of associates 53 (18)   93 21  
Minority interest 780 592 -24.1% (382) 1,710  
Profit after share of associates & minority interest 28,404 20,696 -27.1% 49,020 47,648 -2.8%
No. of shares         929.6  
Basic reported earnings per share (Rs)*         51.3  
P/E ratio (x)*         35.3  
* On a trailing twelve month basis

What has driven performance in 4QFY15?
  • The sales growth was sluggish during the quarter as constraints in a certain sectors in the projects oriented business slowed down the pace of execution.

  • The quarter of 4QFY14 included a onetime write-back of Rs 6.4 bn with regards to an amortization charge of toll road projects. The decline in profits on a YoY basis during the 4QFY15 is higher due to the consequent higher base.

  • The company secured orders worth Rs 476 bn during the quarter, which is a 39% YoY increase over the previous financial year's quarter. Of this, international orders comprised 24% of the inflows.

  • The company's consolidated order book stood at Rs 2,326 bn as at the end of the quarter, an increase of 28% YoY, of which international orders comprise 26%.

  • The power, metals, heavy engineering, and hydrocarbons segments put pressure on the operating margins during the quarter, most other segments saw an uptick in margins. The net result was a margin profile lower than the same quarter of the previous year.

  • The hydrocarbons business was the biggest drag; it saw its margins slip further into the negative on account of under recoveries of overheads and additional time & cost overruns on international jobs.

    Segment-wise performance (Consolidated)
    (Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
    Infrastructure
    Revenue 141,425 156,849 10.9% 380,213 448,588 18.0%
    % share 50% 53%   43% 47%  
    EBIT margin 1.1% 12.4%   9.7% 9.5%  
    Power
    Revenue 15,884 14,481 -8.8% 61,546 47,564 -22.7%
    % share 6% 5%   7% 5%  
    EBIT margin 23.6% 10.0%   22.4% 11.6%  
    Metallurgical and Material Handling
    Revenue 18,293 9,528 -47.9% 57,320 34,265 -40.2%
    % share 6% 3%   6% 4%  
    EBIT margin 16.8% 6.3%   14.4% 7.0%  
    Heavy Engineering
    Revenue 14,634 10,214 -30.2% 45,247 36,246 -19.9%
    % share 5% 3%   5% 4%  
    EBIT margin 16.7% 8.0%   11.0% 6.3%  
    Electrical & Automation
    Revenue 15,622 17,452 11.7% 51,327 54,595 6.4%
    % share 6% 6%   6% 6%  
    EBIT margin 13.9% 13.4%   10.6% 10.1%  
    Hydrocarbon
    Revenue 21,339 22,353 4.8% 101,316 74,318 -26.6%
    % share 8% 8%   11% 8%  
    EBIT margin -7.9% -9.4%   1.0% -18.1%  
    IT & Technology Services
    Revenue 17,116 20,422 19.3% 64,496 76,589 18.8%
    % share 6% 7%   7% 8%  
    EBIT margin 16.8% 18.8%   19.2% 17.2%  
    Financial Services
    Revenue 13,943 16,760 20.2% 51,809 64,005 23.5%
    % share 5% 6%   6% 7%  
    EBIT margin 15.6% 12.6%   12.5% 15.9%  
    Developmental Projects
    Revenue 6,434 8,784 36.5% 15,429 51,536 234.0%
    % share 2% 3%   2% 5%  
    EBIT margin 142.6% 14.2%   58.3% 32.5%  
    Others
    Revenue 16,823 16,353 -2.8% 54,925 65,848 19.9%
    % share 6% 6%   6% 7%  
    EBIT margin 16.3% 17.8%   8.7% 18.1%  
    Total Revenue* 281,512 293,195 4.2% 883,628 953,556 7.9%
    * Excluding inter-segment adjustments & excise duty
What to expect?
As far as the near term is concerned, the demand environment for capital investments remains impacted. However over the medium term, the management expects that the reforms process in India will gain ground. Speedy execution of larger projects as well as ironing out the issues in stalled projects will likely give that much needed boost to India's growth momentum.

The company is looking at the government's focus on infrastructure development, manufacturing of defense equipment, fast tracking power and mining sector reforms, and a thrust on the 'Make In India' programme as positives for the company's businesses. As for the Middle Eastern region, an important market for the company, the lull in oil prices along with geo-political tensions have impacted investments.

At the current price of Rs 1,810, the stock trades at 22.2 times our FY17 earnings estimates for the company. Considering these expensive valuations, we maintain a SELL view on the stock at current levels.

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