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L&T: Margins under pressure
Jul 23, 2012

Larsen & Toubro (L&T) has announced the first quarter results of financial year 2012-2013. The company has reported 26.1% YoY and 15.7% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 26.1% YoY during 1QFY13.
  • Operating profits decline 5.3% YoY in 1QFY13. In line with operating profits, margins decline by 300 bps to 9.1% during the quarter.
  • Net profits increase by 15.7% YoY during the quarter. However, after adjusting for exceptional items the recurring profits grew by 20.9% YoY. The exceptional item pertains to employee compensation pursuant to the voluntary retirement scheme initiated by the company.
  • At the end of the quarter, the order book stood at Rs 1,530.9 bn. Roughly 47% of the order back log belongs to the infrastructure sector while 27% belongs to the power sector.
  • The total order inflow during the quarter stood at Rs 196 bn, up 21% YoY. Out of the total order inflow, roughly 65% was from the infrastructure sector and 21% from the power sector.

Financial performance snapshot (Standalone)
(Rs m) 1QFY12 1QFY13 Change
Sales 94,821 119,554 26.1%
Expenditure 83,337 108,684 30.4%
Operating profit (EBDITA) 11,484 10,870 -5.3%
Operating profit margin (%) 12.1% 9.1%  
Other income 2,697 6,058 124.6%
Interest 1,573 2,284 45.2%
Depreciation 1,679 1,919 14.4%
Exceptional items   (383)  
Profit before tax 10,929 12,341 12.9%
Tax 3,468 3,705 6.8%
Extraordinary items, net of tax - -  
Profit after tax/(loss) 7,462 8,636 15.7%
Net profit margin (%) 7.9% 7.2%  
No. of shares   612.8  
Basic reported earnings per share (Rs)*   14.1  
P/E ratio (x)*   18.1  
* On a trailing twelve month basis

What has driven performance in 1QFY13?
  • L&T grew its standalone sales by around 26.1% YoY during 1QFY13. This was on the back of a 29.5% YoY growth in the company's Engineering & Construction (E&C) division. However, revenues from the Machinery & Industrial products (M&I) division declined 16.6% YoY. Nonetheless, revenues from the Electrical and Electronics (E&E) division were flat at 1.9% YoY.

  • Healthy execution in power, hydrocarbons and minerals & metals space resulted in strong revenue growth from the E&C division. Apart from this, the order inflow from the segment also increased 23% YoY. The E&C segment garnered fresh orders to the tune of Rs 178 bn during the quarter. Further, revenues from the E&E segment were relatively flat due to sluggish industrial offtake.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY12 1QFY13 Change
    Engineering & Construction
    Revenue 80,992 104,898 29.5%
    % share 83% 86%  
    EBIT margin 10.0% 9.4%  
    Electrical & Electronics
    Revenue  7,462 7,603 1.9%
    % share 8% 6%  
    EBIT margin 8.3% 5.3%  
    Machinery & Industrial Products
    Revenue 6,902 5,753 -16.6%
    % share 7% 5%  
    EBIT margin 17.7% 12.7%
    Others
    Revenue 1,990 3,630 82.4%
    % share 2% 3%  
    EBIT margin 21.2% 28.7%
    Total*
    Revenue 97,345 121,883 25.2%
    * Excluding inter-segment adjustments & excise duty
  • L&T's operating margins declined to 9.1% during the quarter. Operating expenditure increased due to increase in material cost and selling, general & administrative expenses (SG&A). Material expenses were impacted by higher input cost and job mix while SG&A expenses increased due to marked to market forex losses.

  • L&T's profits grew by 15.7% YoY during 1QFY13. However, after adjusting for exceptional items the recurring profits grew by 20.9% YoY. The bottomline growth was supported by 125% YoY growth in other income which was boosted by dividends from associates and treasury gains. Nonetheless, depreciation and interest expenses increased 14.4% YoY and 45.2% YoY respectively thereby negatively impacting the profitability.

What to expect?
Despite execution issues prevailing in the sector, revenue growth posted by the E&C segment was highly commendable. Even the order inflow of Rs 178 bn, up 23% YoY came in as a surprise. The growth predominantly came in from the transportation and urban infrastructure sectors. While performance from the E&E segment was relatively modest, the future prospects appear bright due to steps being taken to enhance the product range and strengthen the distribution network.

Management reiterated its guidance of 15-20% growth in both revenues and order inflows for FY13. It may be noted that in the previous quarter, the company had stated its plans to raise its revenues from the international operations amidst slowdown in the domestic markets. It may be noted that the strategy is progressing well with the company looking to further improve its market share in Middle East. Taking into consideration the diversified nature of the order book, current valuations and long term growth prospects, we maintain our positive view on the stock.

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