L&T: Lag effect inflates 1QFY02 - Views on News from Equitymaster

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L&T: Lag effect inflates 1QFY02

Jul 18, 2001

Larsen and Toubro (L&T), the cement and engineering major, has reported a sharp 245% rise in net profits for the first quarter ended 30th June 2001. However, if one were to take a closer look, in 1QFY01, L&T reported a 76.2% drop in net profits due to subdued demand for cement and lower growth in its EPC business (the orderbook of the EPC division actually declined by 13% in 1QFY01). As a result, 1QFY02 profit growth seems to be very significant.

(Rs m) 1QFY01 1QFY02 Change
Net Sales 16,634 18,310 10.1%
Other Income 326 457 40.1%
Expenditure 15,165 16,155 6.5%
Operating Profit (EBDIT) 1,469 2,154 46.7%
Operating Profit Margin (%) 8.8% 11.8%  
Net Interest 838 942 12.4%
Depreciation 751 818 8.9%
Profit before Tax 206 852 313.3%
Tax 17 201 1080.6%
Profit after Tax/(Loss) 189 651 244.3%
Net profit margin (%) 1.1% 3.6%  
No. of Shares (eoy) (m) 249 249  
Diluted Earnings per share* 3.0 10.5  
(* annualised)      

Having said that, sales for 1QFY02 has registered an encouraging 10.1% rise to Rs 18,310 m. For the first time in two years L&T has said that orders for its engineering division are finally coming through. Its EPC order backlog is over Rs 90 bn. A look at the major contracts awarded last year reveals a number of them are road projects. This seems to have benefited its cement division as well.

This apart, there is a general uptrend in cement demand with effect from the second half of FY01. This seems to be holding on as is apparent from the cement despacthes reported by some key cement companies in the first quarter of the current year. Besides, cartelisation also helped in maintaining per bag prices. As a result, operating profits and margins have increased in 1QFY02. Other income in the aforesaid quarter has also gone up significantly by 40.1% to Rs 457 m.

Operating margins in 1QFY02 have gone up to 11.8%, an increase of 300 basis points. However, higher interest, depreciation and tax outflow has resulted in lower growth in net profits. The sharp rise in tax outflow is primarily on account of additional provision made by the company to the tune of Rs 80 m towards deferred tax liability in accordance with the new accounting standard. The company is yet to finalise the sale of its cement division, which the markets were expecting by the end of financial year 2001 itself.

The scrip is currently trading at Rs 216 at a P/E multiple of 20.6x the annualised 1QFY02 earnings. On the annualised sales of Rs 73,239 m, market capitalisation to sales works out to be 0.7 times (market capitalisation is Rs 53,784 m).


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