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L&T: E&C segment - the dampener - Views on News from Equitymaster

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L&T: E&C segment - the dampener

Jul 27, 2010

L&T declared its 1QFY11 results. The company has reported 6% YoY growth in sales while its net profits have grown 15% YoY. Here is our analysis of the results.

Performance summary
  • Standalone net sales grow by 6% YoY during 1QFY11, aided by a 29% YoY growth in the electrical and electronics business. The company's order book grows by about 50% YoY during the quarter. Order backlog at the end of June 2010 stood at Rs 1,078 bn.
  • EBIDTA margins expand by 1.6% YoY on the back of lower raw materials costs as also lower sub contracting charges.
  • Net profits come in higher by 15% YoY (excluding the one-time profit on account of stake sale in Ultratech Cement during the previous quarter). Profit growth is higher than topline growth on account of the expansion in operating margins.

Financial performance snapshot (Standalone)
(Rs m) 1QFY10 1QFY11 Change
Sales 73,627 78,351 6.4%
Expenditure 65,784 68,783 4.6%
Operating profit (EBDITA) 7,843 9,568 22.0%
Operating profit margin (%) 10.7% 12.2%  
Other income 2,703 2,770 2.5%
Interest 1,096 1,423 29.9%
Depreciation 937 1,142 21.8%
Profit before tax 8,514 9,773 14.8%
Tax 2,730 3,112 14.0%
Extraordinary income/(loss) 10,199 -  
Profit after tax/(loss)# 5,783 6,662 15.2%
Net profit margin (%) 7.9% 8.5%  
No. of shares 586.2 603.2  
Diluted earnings per share (Rs)*   53.9  
P/E ratio (x)*   34.8  
* On a trailing 12-months basis    # Excluding extraordinary income/(loss)

What has driven performance in 1QFY11?
  • L&T grew its standalone sales by around 6% YoY during 1QFY11. This growth has been helped by a stellar 29% YoY growth in sales of its E&E division (9% of total sales during the quarter). As for the company's engineering and construction (E&C) business, sales remained almost flat as compared to the same quarter last fiscal. However, this division recorded an order inflow of Rs 138 bn during the quarter. This is higher by 65% YoY, and evidence that the company continues to bag big orders in this segment. At the end of June 2010, it had an order backlog of Rs 1,055 bn.

    The third business of Machinery & Industrial Products (MIP) recorded a growth in topline of over 25% YoY during the quarter as the recovery in the economy benefited the offtake for the products of the MIP segment.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY10 1QFY11 Change
    Engineering Construction      
    Revenue 65,729 66,438 1.1%
    % share 86% 82%  
    EBIT margin 10.6% 12.3%  
    Electrical Electronics      
    Revenue 5,759 7,451 29.4%
    % share 8% 9%  
    EBIT margin 11.8% 9.9%  
    Machinery Industrial Products      
    Revenue 4,370 5,482 25.5%
    % share 6% 7%  
    EBIT margin 21.8% 20.6%  
    Revenue 771 1,220 58.3%
    % share 1% 2%  
    EBIT margin 5.4% 27.4%  
    Revenue 76,628 80,592 5.2%
    EBIDTA margin 11.3% 12.9%  
    * Excluding inter-segment adjustments

  • L&T's operating margins expanded by 1.6% YoY during 1QFY11. This was on account of a decline in raw material costs as also a fall in sub-contracting charges (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 both the other segments of MIP and E&E.

  • L&T's bottomline grew by 15% YoY (excluding extraordinary items) during 1QFY11. The bottomline managed to grow at a faster pace than the topline mainly due to the expansion in operating margins. Interest costs on the other hand rose by 30% YoY. Were it not for this spike in interest costs, the company's bottomline would have grown at a faster pace.

What to expect?
At the current price of Rs 1,863, the stock is trading at a multiple of 20.5 times our estimated FY13 consolidated earnings. The engineering and construction segment of the company which accounted for 83% of sales saw a lackluster performance this quarter. One reason for this is that this segment is in the initial stage of execution in many of the large value projects it has secured in the recent past.

The company has a policy of not recognising any revenues from a particular project until a particular threshold of progress is achieved in it. Thus projects still in the early stages do not show up in its topline as revenues. As per the management, the segment is bound to see increased sales during the second half of FY11 when execution in these projects will have advanced to a larger extent.

Although the company's overall business remains a sound one, the stock's current valuations may limit any significant upside from here on. Thus, at current levels we hold a cautious view on the stock (ResearchPro subscribers, kindly click here)

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