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L&T: Slowdown in sales - Views on News from Equitymaster

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L&T: Slowdown in sales

Jul 16, 2009

Performance summary
  • Standalone net sales grow by a 7% YoY during 1QFY10. Growth aided by an 18% YoY growth in the engineering and construction business - segment's order book grows by 24% YoY during the quarter. Order backlog at the end of June 2009 stood at Rs 700 bn, including Rs 96 bn of international orders (about 14% of order book).
  • EBIDTA margins expand by 1% YoY on the back of lower raw materials and construction materials costs, and lower cost of goods purchased for trading (all as a percentage of sales).
  • Net profits higher by 15% YoY, higher than the topline growth on account of higher other income and a lower effective tax rate.

Financial performance snapshot (Standalone)
(Rs m) 1QFY09 1QFY10 Change
Sales 69,014 73,627 6.7%
Expenditure 62,318 65,764 5.5%
Operating profit (EBDITA) 6,696 7,863 17.4%
Operating profit margin (%) 9.7% 10.7%
Other income 2,018 2,683 33.0%
Interest 505 1,096 117.0%
Depreciation 659 937 42.3%
Profit before tax 7,551 8,514 12.7%
Tax 2,526 2,730 8.1%
Extraordinary income/(loss) - 10,199
Profit after tax/(loss)# 5,024 5,783 15.1%
Net profit margin (%) 7.3% 7.9%
No. of shares 292.4 586.2
Diluted earnings per share (Rs)* 47.5
P/E ratio (x)* 29.1
On a trailing 12-months basis , # Excluding extraordinary income/(loss)

What has driven performance in 1QFY10?
  • L&T grew its standalone sales by around 7% YoY during 1QFY10. Apart from due to a general slowdown in infrastructure activity, the lackluster sales growth is also a result of sale of ready mix concrete (RMC) business which was under the company in 1QFY09, and was later divested during the latter part of the year. Excluding the effect of this, L&T's sales on a like to like basis have grown by about 11% YoY during 1QFY10. This growth has been helped by an 18% YoY growth in sales of the E&C division (86% of total sales during the quarter). This division recorded an order inflow of Rs 84 bn during the quarter. At the end of June 2009, it had an order backlog of Rs 700 bn, including Rs 96 bn of international orders.

  • As for the company's electrical and electronics (E&E) business, sales remained almost flattish compared to the same quarter last fiscal. The management has attributed this lacklustre performance to general slowdown in the industrial sector. The third business of Machinery & Industrial Products (MIP) recorded a decline of over 31% YoY during the quarter as the recessionary environment in the manufacturing and industrial sectors continued to severely affect demand for the range of products of the MIP segment.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY09 1QFY10 Change
    Engineering & Construction      
    Revenue 55,759 65,729 17.9%
    % share 77.8% 85.8%
    EBIT margin 9.7% 10.6%
    Electrical & Electronics      
    Revenue 5,779 5,759 -0.3%
    % share 8.1% 7.5%
    EBIT margin 11.8% 11.8%
    Machinery & Industrial Products      
    Revenue 6,358 4,370 -31.3%
    % share 8.9% 5.7%
    EBIT margin 23.2% 21.8%
    Revenue 3,761 771 -79.5%
    % share 5.2% 1.0%
    EBIT margin 6.7% 5.4%
    Revenue 71,657 76,628 6.9%
    EBIDTA margin 10.9% 11.3%
    * Excluding inter-segment adjustments

  • L&Tís operating margins expanded by 1% YoY during 1QFY10. This was on account of decline in raw material and construction materials costs, as also the lower overall cost of goods purchased for trading (all as a percentage of sales).Based on segments, while the E&C segment recorded expansion in EBIT margins, there was a contraction in profitability of the MIP business. The E&E business managed to maintain its EBIT margins at 11.8%.

  • L&Tís bottomline grew by 15% YoY (excluding extraordinary items) during 1QFY10. The bottomline managed to grow at a faster pace than the topline due to three factors - the expansion in operating margin, a higher growth of 33% YoY in other income, and a lower effective tax rate. The company also recorded an exceptional gain of Rs 10,199 m on sale of its stake in Ultratech Cement during the quarter.

What to expect?
At the current price of Rs 1,378, the stock is trading at a multiple of 15 times our estimated FY12 consolidated earnings. L&T's management has expressed that going forward, the E&E segment is expected to show a tendency to move more from products oriented to a projects oriented business. This would be on account of customer preferences, which would be advantageous for the company as that is where its forte lies. Though there are some signs that the E&E business will see some increase in uptake in the latter part of this year, the MIP segment will continue to be completely reliant on the economic conditions prevailing in the country.

Until a full blown recovery happens in the domestic and global economy, the company expects more of productivity linked capex instead of expansion linked capex driving its growth in the short term. Also, another good source of orders is expected to be the public sector which will continue to see investments. The company's boiler and turbine manufacturing facilities under its JV with Mitsubishi Heavy Industries are expected to be ready by the end of this year and in the second half of next year respectively, each of which will have capacities of 4,000 MW of super critical equipment.

All in all, L&T expects an order inflow growth of about 25% YoY for the full year of FY10. Although the company's overall business remains a sound one, the stockís current valuations may limit any significant upside from here on.

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Feb 21, 2019 11:23 AM