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L&T: Project stake sale drives performance
Jul 28, 2014

Larsen & Toubro (L&T) has announced the first quarter results of financial year 2014-2015 (1QFY15). The company has reported 10% YoY growth in sales while net profits have grown 111% YoY. Here is our analysis of the results.

Performance summary
  • Consolidated net sales for the company grew by 10% YoY during 1QFY15. The performance was boosted by a good show in the company's infrastructure, IT & technology, financial services and development projects segments.
  • Operating expenses for the company increased by 7.1% YoY. While raw material cost as a percentage of sales declined from 54.4% in 1QFY14 to 50.2% in 1QFY15; there was an increase in other manufacturing costs and staff cost. Overall, operating profit grew by 34.3% YoY in 1QFY15. As a result, operating margin improved to 13.3% in 1QFY15 from 10.9% in the corresponding quarter of last year.
  • Net profit grew by 111% YoY during the quarter due to a good performance at the operating level along with exceptional gains during the quarter. Recurring net profit, i.e. excluding exceptional gains, grew by 68% YoY.
  • The company received an order inflow of Rs 334 bn during the quarter, a growth of 11% YoY. The total order backlog at the end of the quarter for the company stood at Rs 1,954 bn; growing by 13% YoY.

Financial performance snapshot (Consolidated)
(Rs m) 1QFY14 1QFY15 Change
Sales 172,411 189,748 10.1%
Expenditure 153,683 164,595 7.1%
Operating profit (EBDITA) 18,728 25,153 34.3%
Operating profit margin (%) 10.9% 13.3%  
Other income 2,635 2,770 5.1%
Interest 7,108 7,787 9.6%
Depreciation 5,567 8,073 45.0%
Exceptional items - 2,493 -
Profit before tax 8,689 14,556 67.5%
Tax 4,720 4,490 -4.9%
Extraordinary items, net of tax - -  
Profit after tax/(loss) 3,969 10,066 153.6%
Net profit margin (%) 2.3% 5.3%  
Share in profit of associates 17 16  
Minority interest (600) 413  
Profit after share of associates & minority interest 4,586 9,669 110.8%
No. of shares   927.7  
Basic reported earnings per share (Rs)*   58.3  
P/E ratio (x)*   26.1  
* On a trailing twelve month basis

What has driven the performance in 1QFY15?
  • L&T's sales growth was positively influenced largely by a growth in sales of its infrastructure, IT, financial services and developmental projects segments. Also the company has monetised its stake in a port concession project (Dhamra Port), which has added to revenues. Within the infrastructure segment, which has the biggest share in total sales, the heavy civil infrastructure, transportation infrastructure and water & renewable energy businesses drove the segment's total revenue growth of 17.8% during the quarter. Exports have contributed 25% to sales in 1QFY15.

  • The decrease in operating expenses was a result of decrease in materials costs which was led by a fall in the costs of sub-contracting and construction materials.

  • Segment wise Hydrocarbon, Power, Metallurgical and Electrical & Automation segments registered a sharp decline in EBIT margin; while EBIT margin for Financial Services, Developmental Projects and Other segments improved significantly.

  • The good performance at operating level reflected at the net level as well. Consequently, profit after tax was up 111% YoY. Excluding the exceptional items, which represent a gain on the divestment of stakes in L&T Finance Holdings and City Union Bank, as per the company recurring profit after tax grew by 68% YoY.

  • Order inflow growth was driven mainly by international order inflows during the quarter, which stood at Rs 147.5 bn, and which was a growth of over 2 times compared to the same quarter last year. These constituted almost 44% of the order inflows of the quarter.

    Segment-wise performance (Consolidated)
    (Rs m) 1QFY14 1QFY15 Change
    Engineering & Construction
    Infrastructure
    Revenue 63,833 75,208 17.8%
    % share 36% 38%  
    EBIT margin 8.2% 7.9%  
    Hydrocarbon
    Revenue 30,746 15,573 -49.3%
    % share 17% 8%  
    EBIT margin 4.1% -60.5%  
    Power
    Revenue 14,516 9,861 -32.1%
    % share 8% 5%  
    EBIT margin 17.8% 14.3%  
    Metallurgical and Material Handling
    Revenue 11,236 9,407 -16.3%
    % share 6% 5%  
    EBIT margin 12.4% 9.5%  
    Heavy Engineering
    Revenue 8,965 8,625 -3.8%
    % share 5% 4%  
    EBIT margin 4.0% 3.2%  
    Electrical & Automation
    Revenue 10,120 10,543 4.2%
    % share 6% 5%  
    EBIT margin 8.4% 4.9%  
    IT & Technology Services
    Revenue 14,372 17,509 21.8%
    % share 8% 9%  
    EBIT margin 23.0% 16.9%  
    Financial Services
    Revenue 11,906 14,827 24.5%
    % share 7% 8%  
    EBIT margin 13.4% 22.9%  
    Developmental Projects
    Revenue 3,242 21,906 575.7%
    % share 2% 11%  
    EBIT margin -9.0% 56.2%  
    Others
    Revenue 10,532 13,359 26.8%
    % share 6% 7%  
    EBIT margin -4.6% 14.2%  
    Total Revenue* 179,467 196,816 9.7%
    * Excluding inter-segment adjustments & excise duty
What to expect?

L&T's performance at the bottom line level looks robust. However, in the case of an engineering company, quarterly revenue and margin cannot suggest a specific growth trend. This is because there is a non-linearity in execution of projects as well as booking of margins depending on certain milestones.

Further, a big contribution to the increase in revenues and margins for the quarter has been from the monetisation of the company's stake in a port concession project (Dhamra Port). The company has booked this as revenues from normal operations rather than as an exceptional gain as it believes stake sales in concession projects to be a part of recurring business rather than onetime gains.

Also, the company's Hydrocarbon business has been a source of big disappointment. The company has seen an unprecedented loss of Rs 9.4 bn at an EBIT level in this segment during the quarter. There have been 5-6 international hydrocarbon projects that are seeing such losses due to execution related issues. The management has indicated that it has already tried to provide for all foreseeable losses on this front and they should likely finish execution by the end of FY15, but there is still uncertainty on this front.

As per the management, the domestic business environment and investment cycle continued to remain subdued during the quarter. The company has weathered the domestic slowdown by strengthening its international presence in selected overseas markets. The company has indicated that even though there is good optimism about the capex cycle turning around in India, it will take some time for this to show on the ground in terms of order inflows, execution etc. The management has for now maintained its guidance of 15% YoY growth in sales and 20% YoY growth in order inflows for FY15.

At the current price of Rs 1,524, the stock trades at 26.1 times its reported trailing twelve months earnings. We shall soon update the investors with a revised view, if any, and target price on the stock.

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