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L&T: Goliathís surge continues
Jul 29, 2008

Performance summary
  • Standalone net sales grow by a robust 53% YoY during 1QFY09. Growth aided by a 59% YoY growth in sales of the engineering and construction business Ė segmentís order book grows by 28% YoY during the quarter. Order backlog at the end of June 2008 stood at Rs 563 bn (almost 3 times the segmentís FY08 sales), including Rs 91 bn of international orders.
  • EBIDTA margins expand marginally by 0.1% YoY on the back of lower raw materials and staff costs (both as percentage of sales).
  • Net profits surge by 33% YoY, although it remains lower as compared to topline growth on account of lower other income and substantially higher interest expenses.


Financial performance snapshot (Standalone)
(Rs m) 1QFY08 1QFY09 Change
Sales 45,040 69,014 53.2%
Expenditure 40,810 62,441 53.0%
Operating profit (EBDITA) 4,231 6,574 55.4%
Operating profit margin (%) 9.4% 9.5%  
Other income 2,115 2,018 -4.6%
Interest 157 382 143.3%
Depreciation 424 659 55.3%
Profit before tax 5,764 7,551 31.0%
Tax 1,995 2,526 26.6%
Profit after tax/(loss) 3,769 5,024 33.3%
Net profit margin (%) 8.4% 7.3%  
No. of shares 283.8 292.4  
Diluted earnings per share (Rs)*   78.6  
P/E ratio (x)*   33.8  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • L&T grew its standalone sales at a robust rate of 53% YoY during 1QFY09. This was on the back of a strong 59% YoY growth in the companyís E&C division (78% of total sales during the quarter). Growth in this segment was aided by the ongoing execution of some large-scale projects. This division recorded an order inflow of Rs 105 bn during the quarter, which was a growth of 28% YoY. At the end of June 2008, the segment had an order backlog of Rs 563 bn, including Rs 91 bn of international orders.

    The quarter saw L&T receiving its first mega order in the power space when it won a contract to supply supercritical steam turbine generator package for a 1,600 MW plant to Andhra Pradesh Generation Company's (APGenco) Krishnapatnam power project. The total cost of the project is estimated at Rs 84 bn while L&Tís share will be Rs 16 bn. The tender is for supply of turbine and generator set for the supercritical thermal power project, which is believed to be the first supercritical thermal project to be commissioned in India.

  • Also read - Power equipments: Some hope at last?

    As for the companyís electrical and electronics (E&E) business, sales grew by a marginal 7% YoY during the quarter. The management has attributed this lacklustre performance to slowdown in industrial growth generally and lower sales in petrol dispensing pumps and metering segments specifically. The third business of Machinery & Industrial Products (MIP) recorded a growth of 50% YoY during the quarter as robust demand from industrial, infrastructure and hydrocarbons sectors led to a greater demand for the companyís construction and mining equipments.

    Segment-wise performance (Standalone)
    (Rs m) 1QFY08 1QFY09 Change
    Engineering & Construction      
    Revenue 34,946 55,417 58.6%
    % share 73.6% 77.7%  
    EBIT margin 8.5% 9.7%  
    Electrical & Electronics      
    Revenue 5,411 5,776 6.7%
    % share 11.4% 8.1%  
    EBIT margin 14.5% 11.5%  
    Machinery & Industrial Products      
    Revenue 4,227 6,335 49.9%
    % share 8.9% 8.9%  
    EBIT margin 21.2% 23.1%  
    Others      
    Revenue 2,914 3,760 29.0%
    % share 6.1% 5.3%  
    EBIT margin 4.2% 6.6%  

  • L&Tís operating margins expanded marginally by 0.1% YoY during 1QFY09. This was on account of decline in raw material and staff expenses (both as percentage of sales). While the former declined from 28.3% of sales in 1QFY08 to 26.4% in 1QFY09, the latter came down from 6.9% to 5.9%. Based on segments, while the E&C and MIP segments recorded expansion in EBIT margins, there was a contraction in profitability of the E&E business.

  • On the back of strong topline growth and stable operating margins, L&Tís bottomline grew by 33% YoY during 1QFY09. The growth was however impacted by a decline in other income (down 5% YoY) and substantially higher interest costs (up 143% YoY). The decline in other income was mainly a result of a lower forex gain of Rs 177 m recorded by the company during 1QFY09, as against a gain of Rs 1,335 m during 1QFY08. Excluding these gains, L&Tís net profits have in fact doubled on a YoY basis.

  • L&T's subsidiaries continue to do well. While the IT subsidiary, L&T Infotech recorded 23% YoY and 56% YoY growth in sales and PAT respectively during 1QFY09, L&T Finance recorded growth of 73% YoY and 25% YoY respectively.

    L&Tís subsidiariesí performance
      Sales (Rs m) PAT margins
      1QFY08 1QFY09 Change 1QFY08 1QFY09
    L&T Infotech 3,460 4,250 22.8% 11.3% 14.4%
    L&T Finance 1,030 1,780 72.8% 19.4% 14.0%
    L&T Infra. Finance 120 750 525.0% 75.0% 24.0%
    Source: Company

What to expect?
At the current price of Rs 2,657, the stock is trading at a multiple of 17.4 times our estimated FY11 consolidated earnings. Apart from bright prospects in India, L&Tís management is bullish on the West Asian market for helping the company maintain a strong growth rate going forward. It expects business from the region to account for 25% of the companyís total sales in two years, compared with the current levels of 16%. Overall, the company expects its order book to grow by 35% YoY during the current fiscal. The commencement of production at its units to handle contracts in the power, shipbuilding and railway sectors is a positive step in this direction. Considering the initiatives that L&T is taking in terms of restructuring its businesses and diversifying into fast growing areas like shipbuilding and power, we maintain our positive view on the stock from a 2 to 3 years perspective. As far as the impact of raw material prices on profitability is concerned, the management has indicated that since around 60% of L&Tís contracts have cost escalation clause, they are in a position to mitigate any risk on this account. Even then, it expects margins to remain at current year levels going forward as well.

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